What kind of austerity after the Covid crisis?

2 December 2020 by Eva Betavatzi

The present circumstances seem to rule out – for a time – using public debt considered to be excessive as a pretext for drastic austerity measures. The illusion of having escaped the vicious circle of debt to austerity is reinforced by the suspension of the strict fiscal conditions that are part and parcel of the monetary union. The health crisis justifies an increase of the public debt / GDP ratio while the recessions that affect the economies of the countries concerned only increase the burden of sovereign debt on public budgets. [1]

The economic, social and political consequences of this massive new debt in EU countries do not seem to be taken into account; what matters is to find money. Possible alternatives to new debt would have been the cancellation of former debt, or a moratorium on their repayment during the health and economic crisis, or better still pending a citizens’ audit that would establish their illegitimate part. [2] This approach would have had the further advantage of integrating into the recovery strategy a long-term reflection on repayment delays for sovereign debt Sovereign debt Government debts or debts guaranteed by the government. . But more debt at any cost was chosen, regardless of the foreseeable consequences for populations, since no lesson seems to have been drawn from the recent experience of the 2008 crisis.

Yet we should not forget the fiscal cuts, the austerity measures or the so-called “necessary collective efforts” in sectors that are still partly public, introduced over the last decade and implemented in order to repay unsustainable sovereign debt. To mention just one example, in spite of the blatant need for more resources and in the face of promises of support, the health sector is still largely underfinanced as consequence of years and years of austerity.

Emergency is the main justification for the amount of debt contracted over the past months, but repayment terms are spread out over a long period of time. Now the sheer difficulty of repaying is compounded with the unforeseeable impact of the crisis on the economy, and thus on the ability to repay. This has three consequences: the governments of debtor countries will have to submit to their creditors for long years to come, which makes it impossible for them to meet the legitimate expectations of the people who elect them; public budgets will decrease while the privatization of public goods and services will surge; basic human rights will not be fulfilled by public authorities because of an alleged “necessary common effort”.

Never in the history of capitalism has an increase of sovereign debt been favourable to populations. The increase of debt related to the present health and economic crisis will not be an exception. The current euphoria on bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. markets and the historically low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
are evidence enough. Debt is essentially an instrument to transfer wealth from the poor to the rich, from tax payers to owners of capital securities. [3]

The consequences of choices made to face the current economic crisis are thus a source of concern, to say the least. After 2008, governments contracted debt to save a banking system on the verge of bankruptcy. The ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

and the European Commission played a crucial part in enforcing austerity measures, thus undermining any hope of popular sovereignty and delegitimizing any government that would not comply. [4] Negotiations could only be considered if agreements were sustained, which meant there could be no negotiations. [5] The case of the Greek debt crisis is particularly clear, but there are other similar instances. Creditors enforced austerity measures on the country in exchange for successive tranches of aid that actually only enabled repayment of creditors. In other words, democracy was sacrificed in the name of public debt repayment.

In the unequal struggle between creditors and debtors, the losers are always those who pay. In several European countries from 2010 to 2020, [6] incomes and old age pensions have plummeted. Funding for health and education also has also fallen sharply. Moreover, a significant part of available housing facilities was sold to investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
, which has led to higher prices and aggravated the housing crisis. Privatization of public goods and services has resulted in an increase in prices that was much steeper than the average increase in income. Finally, the preservation of the environment has been sold off in the name of economic “recovery”.

Creditors have no more cause for concern today than they had yesterday. The former banking crisis and its consequences showed speculators that they could rely on the governments’ support, willy-nilly: if one of them attempted to renegotiate, bilateral and multilateral creditors would team up to force it to pay, thus protecting the interests of financial capital at the expense of those of the people. It is thus legitimate to wonder what kind of austerity will be enforced as a consequence of the massive debt contracted to face the coronavirus crisis or what public goods will have to be sold.


[1As an illustration, the French public debt is now close to a debt/GDP ratio of 120%, which is almost as high as that of Greece in 2009, which was either 113% or 127% after a contested revision of the statistics , see https://www.cadtm.org/Evolution-of-the-Greek-public-debt

[3Maurizio Lazzarato, Le Vol du Temps, Le Monde Diplomatique February 2012, https://www.monde-diplomatique.fr/2012/02/LAZZARATO/47416 (in French only).

[4This kind of double-bind contributed to feed the political aggravation on which the propaganda of authoritarian parties thrives, as illustrated by the rise of the Golden Dawn party in 2012.

[5On the failure of negotiations between the Greek government and the Troika, see Toussaint’s book Grece 2015: There was an Alternative (Resistance Books, 2020).

[6Greece, Cyprus, the Spanish State, Portugal and Ireland were particularly affected by austerity. Almost all EU countries implemented austerity measures.

Eva Betavatzi

Militante au CADTM Bruxelles.

Other articles in English by Eva Betavatzi (5)




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