The euro crisis is a crisis of capitalism

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The euro crisis is a crisis of capitalism

“the EU decision-making process is hopelessly flawed. …. The survival of the euro is not, and never was, a matter of pure capitalist economic rationality. No such thing exists. The euro’s future will be the outcome of a complex interaction of political and economic factors. (We may have) underestimated the collective stupidity of the EU authorities… (so) the euro’s survival hangs by a thread.” Mick Brooks, The crisis of capitalism and the euroi

The Euro crisis is a product of the slump in global capitalism and the subsequent failure to recover is the same.  Profitability in most capitalist economies is still well below the peak of 2007 (the US is the only exception) and for economies like Italy and Slovenia it is still heading downwards. If you correlate profitability with growth since the trough of the Great Recession, the trend line is positively sloped.  Estonia and Ireland have seen the biggest recovery in profitability (through austerity and cutting wages and living standards for the population, along with massive emigration of the unemployed).  As a result, they have had the best GDP recoveries – such as they are.  Where the recovery in profitability has been weak or non-existent, real GDP has contracted the most since 2009.


The correlation between profitability and growth is much better than between government spending and growth, the Keynesian indicator.  Countries where government spending to GDP has increased since 2009 (through Keynesian-style stimulus) like Japan and Slovenia have not grown at all, while there are many countries that applied austerity and reduced government spending to GDP after 2009 and have achieved some growth.  There is no real correlation between growth and austerity (the trend line is almost flat), whatever Keynesian ‘multipliers’ might indicate ii


The build-up of debt, not just for banks, but also for the non-financial capitalist sector has exerted downward pressure on the ability of Europe’s capitalist economies to recover quickly, even after cutting jobs, closing down businesses and ending investment to reduce the cost of capital.  The more the growth in private sector debt before the crisis, the smaller the recovery has been.  Balance sheet stress is heavier on the weaker EMU states and the financial centres of the UK and the US.


The debt servicing burden of the eurozone periphery now accounts for almost 10 cents in every euro of revenues received by these governments. In the other 13 eurozone countries, the same burden averages only 3.5% with the difference in the debt service burden between the indebted periphery and the rest of the zone forecast to rise over the next five years. These high levels of debt service, even with lower interest rates, will erode highly indebted countries’ ability to make investments and maintain social security nets. For example, Portugal’s €7.3bn interest bill this year exceeds its education spending and almost matches its health budget.

The Euro project

There are special features involved in the euro crisis.  Capitalism is a combined but uneven process of development.  It is combined in the sense of extending the division of labour and economies of scale and involving the law of value in all sectors, as in ‘globalisation’.  But that expansion is uneven and unequal by its very mode as the stronger seek to gain market share over the weaker. 

The Euro project aimed at integrating all European capitalist economies into one unit to compete with the US and Asia in world capitalism with a single market and a rival currency.  But one policy on inflation, one short-term interest rate and one currency for all members is not enough to overcome the centrifugal forces of capitalist uneven development, especially when growth for all stops and there is a slump. The professed aim from the beginning of the euro in 1999 was that the weaker economies would converge with the stronger in GDP per capita, fiscal and external imbalances.  But the opposite has happened instead, as the IMF explained recentlyiii: So the graph below rises up from left to right, instead of being flat. The imbalances widened and have not converged.


The global slump dramatically increased the divergent forces within the euro, threatening to break it apart.  The fragmentation of capital flows between the strong and weak Eurozone states exploded.  The capitalist sector of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia etc.  As a result, in order to maintain a single currency for all, the official monetary authority, the ECB and the national central banks had to provide the loans instead.  The Eurosystem’s ‘Target 2′ settlement figures between the national central banks revealed this huge divergence within the Eurozone.


Those who wish the preserve the Euro project like the EU Commission, the majority of EU politicians and most capitalist corporations, recognise that the only way to do so is extend the process towards more integration.  That means a ‘banking union’ so that all the banks in the Eurozone are subject to control by the Euro institutions like the ECB and not national government regulators. 

Better still would be the establishment of a full ‘fiscal union’, so that taxes and spending are controlled by Eurozone institutions and deficits in one EMU state are automatically met by transfers from surplus states.  That is the nature of a federated state like Canada, the US or Australia. These transfers reach 28% of US GDP compared to the controlled and conditional transfers under EU budgets and bailouts of less than 10% of one state’s GDP.


But the Eurozone does not have such a fiscal union and there is little prospect of one. Instead, after much kicking and screaming, the Germans and the EU agreed to set up some fiscal transfer funds, first the EFSF and then the ESM.  But these are not automatic fiscal union transfers; they are contingent on meeting fiscal targets in a Troika (EU, IMF, ECB) program and national governments can still set their own budgets.  And there was growing opposition in Germany to shelling out cash for what they see as wayward countries who cannot get their public finances in order.

The policy of austerity

The ECB, the EU Commission and the governments of the Eurozone proclaimed that austerity was the only way Europe was to escape from the Great Recession. Austerity in the public spending would force convergence too. But the real aim of austerity is to achieve a sharp fall in real wages and cuts in corporate taxes and thus raise the share of profit. The Estonian labour force has been decimated as thousands left this tiny country to seek work elsewhere in Europe.  Estonia also received over €3.4bn in EU structural funds to finance infrastructure spending and employment. In this way, wage costs have been lowered and profits raised.

That other poster child for ‘successful austerity’, Ireland, achieved a partial export-led recovery by getting rid of its ‘excess’ workforce in a similar way.  Irish emigration is now back at levels not seen since the dark days of late 1980s.

Austerity could eventually deliver the required reductions in budget deficits and debt.  But already there have been years of austerity and very little progress has been achieved in meeting these targets and, more important, in reducing the imbalances within the Eurozone on labour costs or external trade to make the weaker more ‘competitive’. 

The adjusted wage share in national income, defined here as compensation per employee as percentage of GDP at factor cost per person employed, is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year.  Every capitalist economy had managed to reduce labour’s share of the new value created since 2009.  Labour has been paying for this crisis everywhere.

change in wage share since peak

Not surprisingly, it has been the workers of the Baltic states and the distressed Eurozone states of Greece, Ireland, Cyprus, Spain and Portugal who have taken the biggest hit to wage share in GDP.  In these countries, real wages have fallen, unemployment has rocketed and hundreds of thousands have left their homeland to look for work somewhere else.  That has enabled companies in those countries to sharply increase the rate of exploitation of their reduced workforce, although so far that has not been enough to restore profitability to levels before the Great Recession and thus sustain sufficiently high new investment to get unemployment down and these economies onto a sustained path of growth – now after five years and in some cases seven.

The major economies of Japan and the US have also achieved a ‘moderate’ reduction in wage share, which is helping to restore profitability. What is worrying for the capitalists of Italy or France is the failure to raise the rate of exploitation much at all.  This failure is slowing the pace of return to profitability – no wonder Italy’s economy continues to grind down and France is stagnant.   And clearly Slovenian capitalism needs to do more to reduce wage share there if it is to recover profitability – at least as much as Portugal, Ireland or Romania.

In all these countries, governments are preparing an agenda of ‘labour market reform’, spending cuts and privatisations designed to hit labour’s share in the national output – there is more misery to come.  Italy’s new Blairite leader, Matteo Renzi is pledged to such neoliberal measures.  France’s Francoise Hollande has had a Damascene conversion to a neo-liberal agenda and Slovenia’s ‘social democrat’ coalition is preparing similar measures.

Emigration the safety valve

One of the striking contributions to the fall in labour’s share of new value has been from emigration.  It has become an important contribution to reducing costs for the capitalist sector in the larger economies like Spain.  Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal and North Africa.  Now that has been completely reversed.

Hundreds of thousands of migrants are heading back home every year, and the country’s overall population is falling for the first time since records began. Spain’s population jumped from 40m in 1999 to more than 47m in 2010, one of the most pronounced demographic shifts experienced by a European country in modern times. The surge was almost entirely the result of migrants from countries such as Ecuador, Bolivia, Romania and Morocco. The number of foreigners living in Spain increased eightfold in just over a decade, while their share of the population soared from less than 2 per cent in 1999 to more than 12 per cent in 2009.

Now, increasingly, they are leaving Spain altogether. In 2008, one year after the start of the crisis, Spain still recorded 310,000 more migrant arrivals than departures. That number fell to just 13,000 the following year before turning negative in 2010. In 2012 there were more than 140,000 more departures than arrivals, and the pace of the exodus is picking up fast. According to the national statistics office, the foreign-born population now stands at 6.6m, down from more than 7m just two years ago.

This net emigration acts a safety valve for Spanish capitalism – unemployment would be even higher without it.  It helps the capitalist sector get down labour costs without provoking a social explosion.  However, over the longer term, this spells deep trouble for capitalist expansion in Spain.  There remains a huge overhang of unfilled real estate from the property boom that triggered the crisis in Spain.  A falling population means that this form of unproductive capital will continue to weigh down Spain’s recovery.  And with a public sector debt to GDP ratio hitting 100%, there will be fewer workers to extract value to service that debt.

Unless the productivity of the smaller labour force can be raised, Spain’s growth rate will be limited.  German capitalism has succeeded to some extent in coping with a falling population. Spanish capitalism will be less able.  After all, most of the people emigrating are the skilled and more productive parts of the workforce.  They are going to Germany, France, the US, even Latin America.  Maybe they will return, as many have done in the Baltic states or Ireland after past recessions ended.  But given the length of this Long Depression, this time could be different.

The recession in the Eurozone, namely a contraction in real GDP, has made fiscal austerity programmes self-defeating.  As the denominator for fiscal deficit or debt to GDP has shrunk, the ratios have risen, despite huge cuts in government spending and higher taxes.  France, which promised to get below the 3% budget deficit to GDP target set by the Eurozone leaders, is forecast to hit 3.7% in 2015 while Spain, which has been granted two separate delays in its timetable to hit the target, is projected to see its deficit rise from 5.9% of GDP in 2014 to 6.6% in 2015.   Overall, the Eurozone sovereign debt ratio will barely budge over the forecast period, hitting another all-time high of 95.9% of GDP next year.

More important for labour, the EU Commission sees little improvement in the unemployment rate in the region.  It is expected to reach an all-time high of 12.2% next year and drop only slightly to 11.8% in 2015.  A quarter of the workforce in both Spain and Greece will remain without jobs through 2015. Portugal will continue to hover around 17.5%.

The Keynesian solution

The crisis in the Eurozone has been blamed on the rigidity of the single currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, Germany. But the euro crisis is only partly a result of the policies of austerity being pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK.  Alternative Keynesian policies of fiscal stimulus and/or devaluation where applied have done little to end the slump and still made households suffer income losses.

Austerity means a loss of jobs and services and thus income.  Keynesian policies mean a loss of real income through higher prices, a falling currency and eventually rising interest rates. Take Iceland, a tiny country outside the EU, let alone the Eurozone.  The widely supported Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone has still meant a 40% decline in average real incomes in dollar terms and nearly 20% in krona terms since 2007.


Restoring profitability is key for economic recovery under the capitalist mode of production.  So which pro-capitalist policy has done best on this criterion?  Let’s compare Greece and Iceland.  Iceland’s rate of profit plummeted from 2005 and eventually the island’s property boom burst and along with it the banks collapsed in 2008-9.  Devaluation of the currency started in 2008, but profitability in 2012 remains well under the peak level of 2004, although there has been a slow recovery in profitability from 2008 onwards.  Greece’s profitability stayed up until the global crisis took hold and then it plummeted and only stopped falling last year.  Profitability in ‘austerity’ Greece and ‘devaluing’ Iceland is now about the same relative to 2005 levels.  So you could say that either policy has been equally useless.

rop gre-ice

Greece cannot escape

At the end of January 2014, finance officials from the Troika (EU Commission, ECB and the IMF) and the finance ministers of Germany and France held a secret meeting to discuss what to do about Greece.  Greek government officials were not invited.  They were trying to figure out how to tackle two issues threatening to unsettle the fragile economic recovery in Greece and the broader euro zone; 1) how to press the Greek government to forge ahead with unpopular ‘structural reforms’; and 2) how to scramble together extra cash to cover a shortfall in the country’s financing for the second half of the year, estimated at €5-6bn.  The meeting was inconclusive.

Greece cannot escape the debt deflation trap that it has descended into. Gross public and private debt relative to GDP has risen to record proportions and is still rising. Greek companies have the highest debt to equity ratio of modern economies at 235%, more than twice the Eurozone corporate average. These debt ratios are rising partly because the deficit on Greek government budgets is only just been closed, but mainly because nominal GDP growth remains non-existent while the cost of servicing debt continues to rise.

The cruel irony is that Troika funds go to the Greek government through an ‘escrow’ account (not controlled by the government) to be used to pay government creditors who turn out to be other EU governments and banks!  Less than 10% of the bailout funds have reached the Greek economy and the people.

Sure, the government has managed to obtain a surplus (before interest payments on debt) in 2013 of €812m.  But the idea that Greece is out of the grip of austerity and will avoid a debt deflation crisis is hogwash. For a start, this budget ‘surplus’ was only possible through extreme austerity cuts on government spending.  Tax revenues still fell short of target.  More important, as a recent OECD (not part of the Troika) report arguesiv, the economic depression that began in 2009 shows no sign of abating. Given that prices are deflating at around 3% a year currently, it means a contraction in nominal GDP of close to 4%, driving up the debt ratio in simple mathematical terms.

The public debt ratio is near 180% of GDP and the economists of OECD predict that by 2020 Greece’s debt pile will still stand at the astronomical level of 157% of GDP in contrast to 124% that Troika is expecting. Even the Troika’s target is still double that set for Euro member states to meet by the end of next decade.  The OECD reckons that the Greek public sector must run a surplus of 4.5% of GDP from now in order to get its debt ratio down to the Troika target.  The OECD reckons that won’t be achieved until 2018.  The reality is that further austerity for another five years is both politically impossible and economically futile. Greece will never do it.

greek deflation

What is the alternative then?  Well, up to now Keynesian economists and many on the left have advocated that Greece needs to break with the euro and the German-led Troika bailout packages.  Greece should restore the drachma and then devalue to boost exports and inflate away the real value of debt.  In short, Greece should ‘do an Argentina’ and default on its public debts.  Two-thirds of the outstanding Greek government debt is held by the Eurozone bailout mechanisms and the IMF.  The other third is mainly held by the Greek banks.

Two things spring from this alternative policy.  First, was the Argentina option of 2002 a success?  The experience of Argentina was partly exceptional and eventually proved unsuccessfulv. Second, if the euro crisis is a crisis of capitalism and not just a problem of the euro as a ‘too strong’ a currency, then devaluation and debt default on its own would only be a temporary palliative for Greek capitalism – and no more pallatable for working people than euro-defined austerity, as it would mean hyperinflation and a collapse of businesses laden with euro debt. The current renewal of Argentina’s crisis has confirmed that

In a January 2015 election, the pro-Troika austerity conservative government in Greece was replaced by an anti-austerity, anti-Troika leftist government. This has led to a new deal with the Euro leaders to reduce the burden of Greek government debt repayments to the ESM and Euro governments and an small opening-up or ‘fiscal space’ to partly reverse austerity measures. But even this may not revive Greek capitalism, which is not just on its knees but is prostrate with life support mechanisms not working.  

It’s true that the crushing of the living standards and wage earnings of Greek households is making Greek industry more ‘competitive’ – labour costs per unit of (falling) production have dropped 30% since 2010.

greek ulc

Greece is not tiny like Estonia, but it is still a relatively small capitalist economy, dependent on trade, mainly of processed minerals, pharmaceuticals and food, as well as services like tourism.  Austerity in Greece is supposed to be aimed at the public sector.  But the reality is that it is private sector workers that have been hit the most.  Public sector employment shrank by some 56,000 from 2009 to 2011, a 7.8% drop.   Private sector employment (a much larger share of the labour force) is down 13%. And labour costs are down 18.5%.  This is the real target of austerity. 

The Greek rate of profit peaked in 2007 some two years before the crisis really hit Greece.  Investment then plummeted 50% from 2007 to now. Austerity has driven the rate of surplus value up by 25% since 2009.  But Greek capitalism is still encumbered by inefficient capitals and the organic composition of capital remains elevated.  So investment is not yet recovering.

greek lt rop

Just relaxing the repayment burden is not enough to restore Greek capitalism

Germany – the success story

The gap between the strong and the weak in the Eurozone has never been greater. Germany is the largest and most important capitalist economy in Europe.  It is the main creditor and funder of the Eurozone member states. 

Germany’s rate of profit fell consistently from the early 1960s to the early 1980s slump (down 30%) – much like the rest of the major capitalist economies in that period.  Then there was a recovery (some 33% up – using Penn measures)  with a short fall during the recession of the early 1990s and then stagnation during the 1990s as West Germany digested the integration of East Germany into its capitalist economy.  The real take-off in German profitability began with the formation of the Eurozone in 1999, generating two-thirds of the rise from the early 1980s to 2007.

german net return on capital

German capitalism benefited hugely from expanding into the Eurozone with goods exports and capital investment until the Great Recession hit in 2008, while other Euro partners lost ground.

change in rate of profit under emu

Once the east was integrated, Germany’s manufacturing export base grew just as much as the new force in world manufacturing, China, did.

german exports

The rise in the rate of profit from the early 1980s to 2007 can be broken down into a rise in the rate of surplus value of 38%, but only a small rise of 5% in the organic composition of capital.  This is consistent with Marx’s law of profitability in that the rate of profit rises when the increase in the rate of surplus value outstrips the increase in the organic composition of capital.  It seems that the ability to extract more surplus value out of the German working class while keeping the cost of constant capital from rising much was the story of German capitalism.  In other words, constant capital did not rise due to innovations and investment in new technology while surplus value did, due to the expansion of the workforce using imported labour from Turkey and elsewhere at first – and then expansion directly into Europe later.

The real jump in the rate of profit began with the start of the Eurozone.  In this period, the organic composition of capital was flat while the rate of surplus value rose 17%.  German capital was able to exploit cheap labour within EMU but also in Eastern Europe to keep costs down. The export of plant and capital to Spain, Poland, Italy, Greece, Hungary etc (without obstacle and in one currency) allowed German industry to dominate Europe and even parts of the rest of the world.

Most important, the fear of the export of jobs to other parts of Europe enabled German capitalists to impose significant curbs on the ability of German labour to raise their wages and conditions.  The large rise in the German rate of profit was accompanied by a sharp increase in the rate of surplus value or exploitation, particularly from 2003 onwards.

german rosv - rop

What happened from 2003 to enable German capitalism to exploit its workers so much more?  In 2003-2005 the SPD-led government implemented a number of wide-ranging labour market ‘reforms’, the so-called Hartz reforms. The first three parts of the reform package, Hartz I-III, were mainly concerned with creating new types of employment opportunities (Hartz I), introducing additional wage subsidies (Hartz II), and restructuring the Federal Employment Agency (Hartz III). The final part, Hartz IV, was implemented in 2005 and resulted in a significant cut in the unemployment benefits for the long-term unemployed.  Between 2005 and 2008 the unemployment rate fell from almost 11% to 7.5%, barely increased during the Great Recession and then continued its downward trend reaching 5.5% at the end of 2012, although it is still higher than in the golden age of expansion in the 1960s.

German unemployment rate (%)

german unemployment rate

A wonderful success then – but not for labour. About one quarter of the German workforce now receive a “low income” wage, using a common definition of one that is less than two-thirds of the median, which is a higher proportion than all 17 European countries, except Lithuania.  A recent Institute for Employment Research (IAB) study found wage inequality in Germany has increased since the 1990s, particularly at the bottom end of the income spectrum. The number of temporary workers in Germany has almost trebled over the past 10 years to about 822,000, according to the Federal Employment Agency.  This is something we have seen across Europe – the dual labour system in Spain being the prime example.

german employment

So the reduced share of unemployed in the German workforce was achieved at the expense of the real incomes of those in work.  Fear of low benefits if you became unemployed, along with the threat of moving businesses abroad into the rest of the Eurozone or Eastern Europe, combined to force German workers to accept very low wage increases while German capitalists reaped big profit expansion.  German real wages fell during the Eurozone era and are now below the level of 1999, while German real GDP per capita has risen nearly 30%.

german real wages

Spain’s inquisition

In the Eurozone’s fourth-largest economy the rate of unemployment hit 27% in 2013 for the first time since records began. That’s six million Spaniards without work in a population of 47m. Youth unemployment (15-24 years) reached an astronomical 55% – only Greek youth are in a worse position for employment.


Even the government admits that the unemployment rate will stay above 25% until at least 2016, while the IMF reckons it will stay above that level until 2018. And for the first time, permanent employment has started to fall as much as temporary employment in the deep economic recession that began in 2008, while long-term unemployment has doubled since 2008. 

The unemployment rate would be even higher except that Spaniards are on their bikes and cars and leaving the country to look for work elsewhere in Europe or even Latin America.  The rate of net emigration has reached 250,000 a year, draining the economy of some of the most educated and productive young Spaniards.  Average wages are plummeting, down nearly 6% in 2012 in nominal terms (i.e. before inflation).  Wages fell at a 14% annualised rate in the last quarter of 2012.  Deducting inflation and real wages are down nearly 9% last year as the government hikes VAT and other taxes.

Spain’s much heralded economic boom saw 3.5% real growth per year during the 1990s. But it stopped being based on productive investment for industry and exports in the 2000s and turned into a housing and real estate credit bubble, just like Ireland’s Celtic Tiger boom did.  House prices to income peaked at 150%, nearly as high as Ireland.  It has fallen back to 120% now, but Ireland has dropped to 85%.  Household debt reached 90% of GDP.  Non-financial corporate debt including that of the developers reached 200% of GDP, the highest in the OECD.

Housing construction doubled from 1995 to 2007 reaching 22% of GDP in 2007!  Investment in real estate then fell from12.5% of GDP in 2006 to 5.3% at end of 2012 and below the historic low of 7% in 1997.  Oversupply of housing is now around 700,000 units.  Sales of new homes have dropped from 400k in 2007 to 115k in 2012.  It would take six years to clear the backlog.  House prices are down 31% in nominal terms and 38% in real terms, but there is still some way to go.  Irish house prices fell 60%. During the property boom, credit grew at 20% a year, way faster than nominal GDP at about 7% a year.  But lending collapse from 2008.  The private sector has deleveraged its debt by 15% of GDP since the peak of 2008.  But debt is still well above accepted international level of 160%.  This is seriously holding back economic recovery.  Capitalists won’t invest if they have to meet heavy debt burdens. And Spanish corporations are most indebted among the major economies.

Much of the funding for the property boom came from abroad, mainly other European banks, greedy to get a piece of the property cake.  Spanish household savings and corporate profits were not nearly enough to fund the boom and all those consumer purchases that it enabled.  Costs of production rocketed and the real price of Spanish exports rose 20% from 2000 to 2009, increasingly pricing them out of world markets. So Spain’s external deficit with the rest of Europe and the world mushroomed. 

The current account deficit reached 10% of GDP in 2007 and net international liabilities (debt and equity) hit 92% of GDP, well above the recommended prudent level of 35% for a growing emerging economy.  Gross external debt is now 160% of GDP, with nearly half in short-term loans.  External debt interest to foreign banks sucks up 2.5% of GDP each year.  Spanish banks and companies can only borrow from the ECB now.  Borrowing from Eurosystem rose from 6% in 2010 to 12% of GDP in 2012.  The Bank of Spain has net liabilities to the Eurosystem at 30% of GDP. This is a huge burden.

And this is a burden that cannot be borne because of the hidden Achilles heel of Spanish capitalism: the long-term decline in its profitability.

spain - rop

Spanish capitalism was not a great success under the military rule of Franco. Profitability fell from the great heights of the golden age of post-war capitalism, as it did for all other capitalist economies from 1963 onwards, in a classic manner, with the organic composition of capital rising nearly 30%, while the rate of surplus value fell by about same. Eventually that led to the fall of Franco and, for a while, Spanish capitalism reversed the decline as foreign investment flooded in to set up new industries, relying on a sharp rise in the rate of exploitation brought about by plentiful surplus labour and a system of temporary employment contracts (while freezing permanent employment), the so-called dual labour policy. 

The rate of exploitation rose over 50% to 1996, accompanied by the foreign-led investment boom in the 1990s.  This drove up the ratio of capital to labour (by 19%), as German and other capitalist companies relocated to Spain in search of cheaper labour and higher profits. That eventually put renewed pressure on the rate of profit.  From 1996, profitability dropped sharply as the wages squeezed profits in the boom of the 2000s.

Spanish capitalists switched to investing in property and riding on the cheap credit boom that disguised weakening profitability in the productive sector. The Spanish economic ‘miracle’ came to a sorry end in the Great Recession, which in turn led to the property bubble burst, bringing about the banking crash. Indeed, it was in that order, unlike the US and the UK. 

The aim of ‘austerity’ and high unemployment is to restore Spanish profitability. It’s a modern capitalist form of the Spanish Inquisition on the people. Corporate revenues dropped by €3bn in 2012 (a 0.5% drop), but there was a €17bn (5%) cut in wages to employees, so profits rose by €6bn. Unit labour costs fell by 3.5% in 2012 as labour laws have been introduced to make it easier to sack permanent staff and end the dual labour system – an ironic reversal of neo-liberal policies. The aim, of course, is not to provide rights for temporary workers but to end them for permanent workers – levelling down.

Can lower wages and high unemployment eventually make Spanish exports more competitive and so restore growth through exports?  Spanish exports in real terms are up €26.3 bn from 2007 (+10%) but its imports are €64.4 billion lower (-20%).  So lower wages and the cost of labour are helping trade, but this change in net trade has been paltry relative to the complete collapse of investment of €108 billion (-36% in real terms).  The Spanish depression is a result of the collapse in capitalist investment (see green line in graph).  To reverse that requires a sharp rise in profitability. And until investment recovers, the depression will not end.

spain and investment

When unit labour costs are driven down sufficiently, enough weak companies are bankrupted and exports are cheap enough, then corporate profitability will rise from the ashes of millions of unemployed, much lower living standards, decimated pensions and destroyed public services that have been burnt at the stake of capitalist accumulation.  The Spanish inquisition will eventually have done its job after years of more misery.

Italy deep in stagnation

In some ways, Italy is in the direst position.  Italian capital was in the doldrums even before the Great Recession.  Profitability has been falling since 2000 and the rate of profit had fallen back to the level of 1963.

italy rop

And since the trough of the Great Recession in mid-2009, Italy’s rate of profit has fallen further and is now down nearly 30% since 2005 compared to 15% for the Eurozone as a whole.

italy rate of profit

As night follows day, with profitability falling, net investment by Italy’s capitalists dried up entirely.

italy net investment

And since the end of the Great Recession, there has been no recovery in investment at all.  Real investment levels are now down 25% from the peak in early 2007.

italy gross real investment

The policies of austerity at first introduced by Berlusconi back in 2010 and then more vigorously by the bankers’ man, Mario Monti, failed even on their own terms.  The public debt to GDP ratio continues to rise and unit labour costs, which have been cut back sharply by austerity in other countries, continue to rise in Italy, despite falling wages, because productivity is falling.

italy gdp

Italian capitalism remains paralysed and it is going to take drastic measures to raise profitability and productivity to turn things around on a capitalist basis. Italy’s only hope is that economic recovery will return to the rest of the Eurozone to improve growth and employment.

The tiny members suffer most

The smaller member states of the Eurozone, like Ireland, Portugal and Cyprus have suffered badly. Tiny Slovenia, a nation of 2 million people wedged along the Alps, between Italy to the west and Austria to the north, is the only Balkan (ex-Yugoslav) country to be in the Eurozone.  Slovenia has been relatively more prosperous than the other Balkan states and avoided the internecine wars that took place between Croatia, Serbia, Bosnia and Kosovo after the collapse of the ‘communist’ Yugoslav federation.  It entered the EU and the Eurozone with great hopes of going forward.  Then the global economic crisis erupted from 2007 onwards. Slovenia seemed to avoid the worst for a while.  But now it has been hit with tremendous damage.  The economy is in a deep recession that began in 2011. 

The Slovenian economic crisis is very similar to that of Ireland.  Slovenia’s state-owned banks had been engaged in massive loans to Slovenian companies, mainly in construction and real estate, stimulating a huge commercial property boom that came crashing down when the global economic slump began.  And just as in Ireland, it has been found that the politicians were in collusion with builders and developers to promote a crazy credit boom, taking a slice of the action for their troubles.

For a while this was covered up, but with unpaid loans now reaching 20% of all lending, the banks are close to bust.  A bailout of the banks is now on the agenda and Slovenia needs at least €5bn by the summer to do it to avoid collapse. Of course, the EU and IMF came up with the usual ‘Irish solution’, which was to hive off all the bad debts into a ‘bad bank’  which the taxpayer must ‘own’, while the cleansed banks are given funds to recapitalise, with the aim of selling them off to foreigners or others as soon as possible.  The Slovenian government will then be left with a public sector debt that will have risen from 23%of GDP in 2008 to 70% by 2017, a massive burden on taxpaying Slovenians.

slovenia debt

And the level of debt built up in the credit boom has destroyed the ability of the banks to provide more credit and companies funds for new investment.  Non-residential capital investment has fallen by nearly 6% of GDP since 2007, as the Slovenian capitalist sector went on strike or bust.  That drop is second only to Ireland in the Eurozone.  The depression is mega-sized for such a small country.

slovenia investment

Will the euro survive?

There are two ways a capitalist economy can get out of slump.  The first is by raising the rate of exploitation of the workforce enough to drive up profits and renew investment. The second is to liquidate weak and unprofitable capital (i.e. companies) or write off old machinery, equipment and plant from company books (i.e. devalue the stock of capital).  Capitalists attempt to do both in order to restore profits and profitability after a slump. 

This is taking a long time in the current crisis since the bottom of the Great Recession in mid-2009. Progress in devaluing and deleveraging the stock of capital and debt built up before is taking time and even being postponed by monetary policy.  But progress in raising the rate of exploitation has been considerable. 

Ultimately, whether the euro will survive is a political issue, depending on the majority view of the strategists of capital in the stronger economies and on the balance of class forces within the Eurozone. Will the people of Greece, Portugal, Spain, Italy, Cyprus, Slovenia and Ireland endure more years of austerity, creating a whole ‘lost generation’ of unemployed young people, as has already happened in Greece and will happen in Spain, Italy, Portugal and Slovenia?

Or will the electorate lose patience and remove pro-austerity, pro-Euro governments as in Greece.  The EU leaders and strategists of capital need economic growth to return soon or further political explosions are likely.  But, given the current level of profitability, it may take too long before, perhaps, the world economy drops into another slump.  Then all bets are off on the survival of the euro.

i (Brooks n.d.)

ii (Roberts 2012)

iii paper (“During the years that followed the euro’s introduction, financial integration proceeded rapidly and markets and governments hailed it as a sign of success. The widespread belief was that it would benefit both south and north—capital was finally able to flow to where it would best be used and foster real convergence. But in fact, a lasting convergence in productivity did not materialize across the European Union. Instead, a competitiveness divide emerged. As the financial crisis gripped the euro area in 2010, these and other problems came to the fore…. In fact, there has been little absolute real convergence in the euro area. Those euro area countries that had low per capita incomes in 1999 did not have the highest per capita growth rate”. 

iv (see here,,

v see


(see my post,

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