The crisis that hit members of the Eurozone a decade ago has often been attributed to design flaws in Europe’s Economic and Monetary Union. Drawing on a new study co-authored with Jamie Jordan we argue that this focus neglects the deeper issues that lie at the heart of European economies. Rather than simply reflecting the flawed institutional setup of the EMU, the crisis emerged from the uneven and combined development that is a feature of how competitive markets function, illustrating the hollowness of the liberal promise of development as a result of market integration and free trade.
Post-Keynesians have delivered an important advance in providing explanations of the Eurozone Crisis, not least in demonstrating how the formation of the European integration project lacked the means to manage effectively the macroeconomic imbalances between ‘core’ and ‘peripheral’ spaces across the region.
In a recent study, we provide a critical engagement with such descriptions. We argue that it is necessary to focus on the uneven and combined development of Europe’s ‘peripheral’ spaces and here in particular their integration into an expanded free trade regime since the 1980s in order to get a better understanding of the roots of the crisis.
Post-Keynesian scholars emphasise unevenness across the European political economy from the onset of EMU in 1999. Their analyses tend to identify the institutional set-up of EMU as the main cause of the crisis and thus uneven development across the European political economy. EMU was designed from the beginning as a model which would struggle to generate enough demand and almost inevitably relied on financialisation and the creation of national and personal debt for economic growth. According to Engelbert Stockhammer:
This has resulted in two distinct growth models, which are both unstable: debt-driven growth and export-driven growth. Both allow for growth, but are intrinsically unstable, because they require increasing debt to income ratios. In the case of the debt-driven model it requires domestic debt; in the case of the export-driven model it requires foreign debt of the trade partners. It is these rising mountains of debt that erupted in the crisis.
The roots of unevenness across the European political economy, however, run much deeper. As Ernest Mandel has correctly observed, there can be no even development within capitalism. Instead, uneven development pertains to the very expansionary essence of capital and the existence of competition between ‘many capitals’ searching for surplus profit and increases in the rate of surplus-value.
European peripheral countries such as Greece and Portugal have been no exception in this respect. Their capitalist development has always been subject to uneven and combined dynamics. Hence, it is through a focus on the structuring condition of uneven and combined development shaped by capitalist social relations of production and attendant class struggles that we can better locate the origins of the crisis. Importantly, while uneven and combined development is a structuring condition of capitalism, the way these dynamics play out in practice very much depends on agency.
Accession to the EU during the 1980s was decisive for both countries. Free trade policies, as initially embedded within the EU Customs Union since 1968 and then especially the Internal Market from the mid-1980s onwards – when free trade was extended from trade in goods to trade in services and finance – generally tend to deepen the inequality between countries, as advanced countries with higher levels of productivity benefit disproportionately from trade.
‘Unevenness is not’, according to Ray Kiely, ‘…a result of market imperfections, but is in fact a product of the way competitive markets work in the real world’. Hence, from joining the EU during the 1980s, uneven and combined development had already been intensified for Greece and Portugal. Unevenness has been reflected in different productivity levels with peripheral European countries such as Portugal historically linked to labour-intensive sectors and states such as Germany mainly involved in capital-intensive sectors of global value chains.
Modernising strategies in the area of industrial production by several successive Portuguese governments have not worked. For example, the Portuguese textile and clothing and footwear industries expanded during the 1980s and 1990s. Nevertheless, this was mainly based on small and medium-sized companies, which functioned as subcontractors to larger, transnational corporations and focused on labour-intensive assembling of prefabricated parts.
Moreover, in 1995 a motor vehicle assembly plant was opened in Palmela near Lisbon as a joint venture with Ford and Volkswagen. Although 50 per cent of components were produced nationally, the remaining 50 per cent, mainly capital-intensive production components, were imported from other countries such as Germany, France and the UK. Considering that Portuguese components and assembling depended on labour intensive aspects of production, it is clear that Portuguese development was subordinated to requirements of the European political economy. Greece has fared even worse since membership. Despite its policy programme of developmental ‘catch-up’ during the 1980s and especially in the 1990s, its economy experienced deindustrialisation from the moment it joined the EU in 1981, unable to cope with the higher levels of competition within the EU free trade regime.
In sum, the Eurozone crisis cannot be explained by referring to the institutional set-up of EMU and a general lack of demand. Rather, the fates of Greece and Portugal are a reflection of the capitalist structuring condition of uneven and combined development, indicating the hollowness of the liberal promise of development as a result of market integration and free trade.
For more information, see the authors’ recent paper in the Journal of Common Market Studies
This post was first published on the London School of Economics (LSE) blog EUROPP | European Politics and Policy