Radical left is right about Europe’s debt

Referendum EU Associatieverdrag Oekraïne

It is logically inconsistent for the eurozone to enter secular stagnation and not restructure.

By Wolfgang Münchau

Let us assume that you share the global consensus view on what the eurozone should do right now. Specifically, you want to see more public-sector investment and debt restructuring.

Now ask yourself the following question: if you were a citizen of a eurozone country, which political party would you support for that to happen? You may be surprised to see that there is not much choice. In Germany, the only one that comes close to such an agenda is Die Linke, the former Communists. In Greece, it would be Syriza; and in Spain, it would be Podemos, which came out of nowhere and is now leading in the opinion polls.

You may not consider yourself a supporter of the radical left. But if you lived in the eurozone and supported those policies, that would be your only choice.

What about Europe’s centre-left parties, the social democrats and socialists? Do they not support such an agenda? They may do so when they are in opposition. But once in government they feel the need to become respectable, at which point they discover their supply-side genes. Remember that, François Hollande, France’s president, explained the policy shift of his government by saying that supply creates demand.

Of the radical parties that have emerged recently, the one to watch is Podemos. It is still young, with an agenda in the making. From what I have read so far, it may be the one that comes the closest of all those in the eurozone to offering a consistent approach to post-crisis economic management.

In a recent interview, Nacho Alvarez, a senior member of the party’s economics team, laid out his programme with a refreshing clarity. The 37-year-old economics professor says the Spanish debt burden, both private and public, is unsustainable and needs to be reduced. That could include some combination of a renegotiation of interest rates, grace periods, debt rescheduling and a haircut. He also said Podemos’ goal was not to leave the eurozone – but that equally the party would not insist on membership at all costs. The aim is the economic wellbeing of the country.

To an outsider, that seems a balanced position. Not so in Spain. The establishment fears that this agenda will turn the country into a European version of Venezuela. But there is nothing controversial about the statement that if debt is unsustainable it needs to be restructured. Or that if the euro were to bring decades of suffering, it would be perfectly legitimate to question the eurozone’s institutions and policies.

The Podemos position recognises a simple truth about the eurozone in late 2014. It is logically inconsistent for the single currency to enter a secular stagnation and not restructure its debt. Since nothing is being done to avoid the former, there is a probability approaching 100 per cent of the latter happening.

Yet, for the moment, European governments keep playing the “extend and pretend” game. Where such a short-sighted strategy leads to can be seen in Greece. After six years of economic depression, the government finds itself in an acute political crisis. Syriza is leading in the polls, and stands a good chance of assuming power at the next general elections, possibly in 2015.

Spain is not yet at that juncture. Podemos might deprive the largest parties – the Popular party of Prime Minister Mariano Rajoy and the opposition Socialist party – of an absolute majority in next year’s elections. It might force the two into a German-style grand coalition – which would establish the new party as the main opposition.

The situation in Italy is different but no less serious. If Prime Minister Matteo Renzi fails to generate an economic recovery in his remaining three years in office, the opposition Five Star Movement would be in pole position to form the next government. Unlike Podemos, this is a truly radical party, a firm advocate of euro exit. So are the National Front in France and Germany’s Alternative für Deutschland.

What Podemos still needs to do is offer a coherent vision of life after a debt restructuring. It would be a good idea if the party organised itself at eurozone-level beyond its alliance with Syriza in the European Parliament, because that is where the relevant policy decisions are made. A debt resolution for Spain, necessary as it is, can only be the start of a wider policy shift.

The tragedy of today’s eurozone is the sense of resignation with which the establishment parties of the centre-left and the centre-right are allowing Europe to drift into the economic equivalent of a nuclear winter. It is a particular tragedy that parties of the hard left are the only ones that support sensible policies such as debt restructuring. The rise of Podemos shows that there is a demand for alternative policy. Unless the established parties shift their position, they will leave a big opening to the likes of Podemos and Syriza.

The Financial Times van 23 november 2014