The grand bargain between Germany, France, and the European Central Bank (ECB) is being hailed as a diplomatic breakthrough that will save the euro and the European Union (EU).
The essence of the deal is this: EU nations commit to an enforceable austerity program, which is ad hoc for now but will eventually become a formal part of the EU treaty. It will take the shape of tight limits on budget deficits, with penalties. That, in turn, gives the ECB the fig leaf it needs to heavily support purchases of bonds from countries like Italy, whose debt has come under speculative attack. All of this reassures markets, and the cost of borrowing comes down. In turn, bank holdings of sovereign bonds retain their value.
To make this deal possible, Germany has backed off its absolute opposition to supporting weaker economies and using the ECB to tacitly support sovereign debt. And France has agreed to give up some of its cherished fiscal sovereignty to the EU.
Isn't this wonderful? No, it's terrible.
When we look through a different lens, a lens of political economy, we see what's actually occurring.
First, the real European economy is condemned to many years of austerity. That, in turn, means prolonged high unemployment, further weakening the bargaining power of wage earners vis-à-vis corporate capital. Europe's economic elites also get new leverage to shrink Europe's welfare state. Notably missing from the deal is any improvement in the regulation of finance, whose abuses caused the crisis in the first place.
In fact, if all this sounds vaguely familiar, it is exactly the grand bargain that has been promoted for two decades by the likes of Peter G. Peterson, Robert Rubin, the members of the Bowles-Simpson Committee, and kindred millionaires who want an enforceable hammer to compel a balanced budget and shrink social spending. The only difference is that on the other side of the Atlantic, the euro crisis gave elites the leverage to pull off this deal.
In the U.S., miraculously, we have dodged this bullet mainly because Republicans have refused to include taxes in the deal. Many Democrats, until lately, have been all too eager to give away the store and sacrifice broadly cherished programs like Social Security and Medicare that have nothing to do with the current financial or fiscal crisis.
Looking forward, I can think of two moderately hopeful signs. First, austerity will not be popular, least of all after three years of high unemployment and belt-tightening. As European nations grapple with how to shrink their deficits, there will be renewed pressure to tax bankers and increase taxes and tax enforcement on the rich in order to avoid shrinking European social outlays that are broadly popular and more generous than ours. To use an awkward phrase, there will be increased consciousness of class.
It is also possible that the backlash against this deal will help the progressive opposition come to power in both France and Germany. Just as intensive government-to-government discussions have taken place in Paris and Berlin, the French Socialists and the German Social Democratic and Green Party leadership have been in discussions about a common program.
The next French presidential election is in late April 2012. The German federal elections must be held by the fall of 2013. A common left program would include substantial public investment to increase growth and reduce unemployment, as well as serious regulation of the financial sector. On the other hand, new center-left governments, under pressure to "reassure markets," could settle for token public spending and token bank regulation, which would change little.
In the meantime, financial elites have won a major victory. The pity is that the press has largely interpreted this in terms of saving the euro and calming capital markets rather than a question of who really benefits and who suffers. A very different strategy could have saved the euro, spared ordinary Europeans the pain of such extensive austerity, and reined in banks to prevent the next crisis from recurring. But that sort of policy change will first require a massive shift in political power.
