The crisis in the eurozone has moved from the economic plane to the political plane – and back again. Europe is stuck in a “doom loop”.
A decade on since the onset of the Great Recession, and Europe remains at the epicentre of capitalism’s global crisis.
Initially attention was focussed on Portugal, Ireland, Greece and Spain, with all of the ‘PIGS’ countries receiving bailouts – in exchange for promises of austerity. Then Britain captured the headlines, with the shock Brexit vote in June 2016 rattling the entire European establishment.
But in recent months, it is Italy – the EU’s third largest economy – that has been at the forefront of concerns.
At first the worries were financial, with Italian banks mired in bad debts as a result of over-lending in a context of years of economic stagnation. But now it is Italy’s political crisis that is shaking market confidence.
The country was without a government since national elections on 4th March, when voters landed a blow against the failed centre-ground establishment, plumping instead for the untested parties of the ‘populist’ 5 Stars Movement (M5S) and the far-right League.
Events ever since have been a rollercoaster ride.
The M5S and League eventually managed to cobble together a proposal to form a coalition government. This prospect terrified the European ruling class, as both parties are generally anti-euro.
The Italian president, Sergio Mattarella, at first blocked the appointment of a suggested (eurosceptic) candidate for finance minister. But this provoked outrage among the wider electorate, as it revealed the powers of the President to interfere in the composition of the government.
The leader of the League, Matteo Salvini, threatened to walk away, prompting speculation of new elections, which would have boosted his party’s position. But the ‘children’ were instead put in a room together by the ‘adults’, and told not to come back out until they had a more acceptable cabinet proposal. The M5S and League leaders acquiesced and the new government was approved by Mattarella.
At the same time, a couple of hops over in Spain, a similar political crisis was taking place, with the Prime Minister – Mariano Rajoy of the right-wing Popular Party – forced to stand down on the back of a no confidence vote in parliament.
These volatile political developments were accompanied throughout by serious jitters on the financial markets. Italy and Spain are no Greece or Portugal. They are major European economies. The latter two countries account for just over 2% of the EU economy; the former, for almost 20%.
Of particular concern is Italy’s sovereign debts, which stand at over 130% of GDP, one of the highest levels in the world. Banks across Europe – in Germany, France, and Spain – are highly exposed to Italian debts. And without a strong and stable government in Italy, there is no possibility of the markets seeing the austerity that is needed to manage the country’s debt.
This is why European markets are on edge. But their knee-jerk response only heightens the threat of an Italian default, which, in turn, would quickly result in contagion across the entire eurozone’s financial system.
This vicious circle is what the Financial Times recently referred to as the “doom loop” facing the euro economy. Only a Socialist United States of Europe can offer a way out of this quagmire.