Europe and the Return of Class Conflict

Matías Vernengo

Almost two decades ago, Francis Fukuyama, at the peak of the hubris and arrogance of neoliberal thinking, famously suggested that history had ended.  The unfolding of the European crisis may finally prove him wrong.  It is true that the failures of the Washington Consensus during the 1990s led to a revival of the left in Latin America, starting with the election of Chávez in 1998.  However, I would venture, risking being a bit Eurocentric, that political changes in the periphery are seldom capable of having global effects in the same way as changes in the center of the capitalist system.

On the other hand, the crisis of the euro, and the adjustment measures taken by the European countries may prove more significant as a way of bringing back the old coalitions that were instrumental in building the Welfare State.  There are at least two elements in the rescue packages implemented in Greece and Spain that are particularly wrongheaded and will have a terrible social impact.

First and foremost, fiscal retrenchment will prove to be a huge mistake.  In Greece, the fiscal adjustment of 11% of GDP over three years, which implies deep cuts in public sector wages, will be futile.  The fall in GDP, if the cuts are actually pursued, would be of at least 16.5% (with a multiplier effect of 1.5), not counting the secondary effects.  At the end of the day, the only solution is either a rescheduling of the debt (in lieu of the default) or major fiscal transfers from the European Union to Greece (not to rescue banks, but to maintain the levels of public spending).

The lesson here is that the New Keynesian euphoria about expansionary fiscal contractions was misplaced.  Krugman is right, in his last column, when he argues that “the deficit hawks are prevailing in most places.”  Mainstream economists are, to a great extent, responsible for this state of affairs, and cannot blame politicians for using the economics discourse that seems expedient to their interests.

In Spain, in addition to big cuts in public spending, particularly in public sector salaries and in pensions to the elderly, the government is pushing through parliament a labor reform.  By labor reform the Spanish government means labor flexibility.  In plain English the legislation tries to make it easier for corporations to fire workers.  Lower wages would produce more employment.  Labor flexibility was one of the mantras of neoliberalism, and it proved to be a failure.

In all cases, the adjustments clearly put the costs squarely on the shoulders of the working class.  The protests have been vigorous.  In Greece three were killed when a bank was set on fire.  In Spain the Trade Unions have called for a general strike, and the relation of the unions with the governing socialist party (PSOE for its Spanish acronym) has deteriorated significantly.  Class conflict is back!

One of the lessons of the failures of the Washington Consensus in Latin America was that the inability of traditional parties, including those on the left, to manage the crisis was instrumental in the rise of a new left.  New social movements and in some cases new parties were the vehicles for the rise of the left in Latin America.  If the left-of-center parties in Europe do not learn all over again the old Keynesian truths that fiscal contraction leads to declining employment and lower wages reduce demand furthering the recession, then the protesters in the streets might replace them.  In this case, bad economics may prove to be bad politics too.

2 Responses to “Europe and the Return of Class Conflict”

  1. Bartosz Bartkowski says:

    “Reforms in the workplace may lead to increased market efficiency but lower worker job satisfaction and therefore a reduction in their sense of well-being.” (Stiglitz, Sen, Fitoussi: “Mismeasuring Our Lives”)
    Now there is a question: what is more important to the Spanish government? And furthermore: what should be more important? I think it shouldn’t be the impersonal efficiency of any impersonal markets.

  2. Bartosz, the problem is that it’s not even true that reform increases efficiency. Making it cheap to fire workers is an instrument to reduce their bargaining power, and lowering their wages. It is not necessary the case that reducing worker’s protections lead to investment in better technologies and higher productivity (efficiency). In fact, in general investment responds to growing demand, and lower wages make it less likely that demand would increase, making improvements in efficiency unnecessary.