The European fiscal pact

5 March 2012

The fact that the European Union formally adopted the fiscal pact on Friday even as the European economy is once again contracting underscores the pact’s deeply reactionary, anti-working class character.

Historical experience demonstrates that slashing public spending deepens an incipient recession. From a purely budgetary perspective the fiscal pact appears nonsensical. As the example of Greece shows, the loss in state revenues caused by a major recession exceeds any savings made by cuts in expenditures, ultimately increasing the budget deficit and national debt, rather than shrinking them.

It would be naive to believe that the European heads of government who adopted the fiscal pact at Friday’s EU summit in Brussels are not aware of this. On the contrary, they are deliberately seeking to bring about a recession, and they are doing so for definite political and class reasons. They intend to use mass unemployment as a battering ram to drive down workers’ wages and dismantle social benefits and public services.

This is not the first time the ruling class deliberately provoked a recession to create favorable conditions to attack the working class. In 1981, the US Federal Reserve raised its key interest rate to an unprecedented 20 percent, choking off home buying and purchases of cars and consumer goods and triggering plant closures and a series of corporate bankruptcies. The result was the deepest recession since World War II.

The aim was to break the back of the labour movement, which, despite the treachery of the union leaders, had been compelled by the militant resistance of the working class to carry out a wave of strikes to maintain wage levels in the face of soaring inflation. The culmination of this movement was a 111-day strike by 100,000 coal miners in 1977-1978. The miners defied a back-to-work injunction handed down by Democratic President Jimmy Carter.

The man responsible for raising interest rates to post-war highs, Federal Reserve Chairman Paul Volcker, had been appointed to the post by Carter in August of 1979. He remained head of the Federal Reserve under Carter’s Republican successor, Ronald Reagan, and spearheaded a policy of “deindustrialization” that involved the dismantling of less profitable sections of industry and a shift of the US economy from manufacturing to financial speculation and manipulation.

Beginning with the destruction of the PATCO air traffic controllers’ union by the Reagan administration in 1981—carried out with the collaboration of the AFL-CIO leadership—a decade-long campaign of strike-breaking, union-busting and labor frame-ups was launched to begin the decimation of workers’ wages and reversal of the gains of previous decades of working class struggle. Social inequality soared along with the wealth of the top income brackets.

In similar fashion, European leaders are now consciously pursuing a deflationary policy in order to destroy the previous improvements in wages and social conditions won by the working class. German Chancellor Angela Merkel, the driving force behind the fiscal pact, has repeatedly stressed that Europe has no future if it is unable to increase its “competitiveness”—i.e., reduce production costs by impoverishing the working class and intensifying its exploitation.

At first glance it might seem paradoxical that Germany of all countries is pushing for greater competitiveness, since it has significantly reduced labour costs in recent years, has benefited more than any other country from the euro, and enjoys large trade surpluses. However, the issue for Germany is not just the European market, but rather the world market, where wages in countries such as China, Vietnam and Bangladesh are increasingly seen as the benchmark.

The investment banks and hedge funds that control the international financial markets require returns of 20 percent or more. Such returns can be achieved only under levels of exploitation such as those that predominated in the early days of industrial capitalism.

German capitalism can hold its ground in the world market only if it can rely on Europe as its production center and internal market (hence its adherence to the European Union and the euro) while at the same time slashing European wages and social standards to correspond to international levels (hence its promotion of the fiscal pact).

On occasion, other European governments grumble about German diktats. But in the face of growing social tensions, the ruling class in Europe closes ranks against the working class. This explains why 25 of the 27 EU governments have signed onto the fiscal pact. For the same reason, countries such as Croatia, Serbia and Turkey remain intent on joining the European Union despite the euro crisis.

This also accounts for the devastating austerity measures implemented in Greece. It is now evident that these measures will not save the country from bankruptcy, but rather accelerate the process of insolvency. The real aim is to establish a new benchmark for the whole of Europe. Workers must be forced to accustom themselves to poverty-level wages, the gutting of education, health care and other social services, and the wiping out of hundreds of thousands of jobs in the public sector.

Any return to a policy of social compromise is impossible under conditions of the global breakdown in the capitalist system that began with the Wall Street crash of 2008. The class divisions in Europe have reached levels that no longer permit half-measures or conciliation. This is demonstrated by the shift of all those organizations that once promoted social reform, democracy and peace to the side of reaction. Social Democratic parties, backed by the trade unions, have taken the leading role in the imposition of austerity measures, while the formerly pacifist Greens have become avid cheerleaders for imperialist war.

Whoever preaches social reform today—such as the German Left Party and similar organizations—does so only to deceive and disorient the workers. The European crisis has revolutionary implications that cannot be avoided.

The fiscal pact and its consequences cannot be implemented through democratic means. In 1930, German Chancellor Heinrich Brüning introduced similar measures in the midst of an international economic crisis. Two years later Hitler took power in Germany.

Even the most basic democratic and social rights can be defended today only on the basis of a socialist program and the mass mobilization of the working class. Workers must unite across Europe to fight for the most basic rights—the right to a job, a living wage, a secure retirement, education, health care, housing—and break the power of the financial oligarchs and their political instrument, the European Union. In place of the existing bourgeois governments, workers must establish workers’ governments that put social needs before the profit interests of big business. The European Union must be replaced by the United Socialist States of Europe.

A new leadership must be built to organize this struggle and arm it with a revolutionary program. This means building the International Committee of the Fourth International and its national sections, the Socialist Equality parties.

Peter Schwarz 

Peter Schwarz

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