The following two-part interview with Joachim Becker,, professor of Economics and Business at Vienna University and deputy head of the Institute for International Economics and Development, was conducted by the Croatian activist and writer Domagoj Mihaljević.

Mihaljević: For the time being, it seems the process of capital accumulation in Europe has been stabilized through policies of fiscal stability and structural reforms. In doing this, the central focus of European ruling classes was to secure the survival of monetary union at any cost necessary. In turn, this has made the fragmentation between the core and peripheral economies ever more visible. How would you describe the multiple layers of dependency existing today in Europe?   

Becker: Within the euro zone, Germany is the core country. The export of goods and capital have been key features of its accumulation regime. Considerable export surpluses have also been recorded by the Netherlands, Scandinavian countries and, to a lesser extent, by Austria. Austria’s economy is, however, in an intermediary position within the European division of labour. On the one hand, Austria is a supplier for the German industry. On the other hand, the Austrian banking sector expanded massively into Eastern Europe and financed the credit expansion in that region, particularly before the global crisis.

The Social Democrat-Green governments headed by Gerhard Schröder created a large low wage sector in Germany. This has had a dampening effect on wages. The deflationary wage policies in Germany put the other euro zone countries – in particular other core economies – under enormous pressure. In addition, the euro appreciated in its early years. Both tendencies proved to be particularly negative for manufacturing in France and Italy. France already suffered a massive relative de-industrialisation in the pre-crisis years whereas the Italian economy stagnated. The French and Italian economies displayed small current accounts in the pre-crisis years. Their position in the European division of labour has visibly weakened.

There are two different peripheries in the EU. The Visegrád countries, Transylvania and, to a lesser extent, Slovenia have been deeply integrated as suppliers into the German export industry complex. Manufacturing is controlled by transnational corporations, particularly in the Czech Republic, Hungary and Slovakia and research and development activities are concentrated in the core countries. In Poland and Slovakia, R & D expenditure is less than 1% of the GDP.

Export industries rely on cheap labour in these countries and particularly in the pre-crisis years, consumption relied on consumer credits. Among this group of countries, credit expansion was most reliant on capital imports in Hungary. And Hungary was particularly hard hit by the crisis.

In the South European and Southeast European countries, growth was fuelled by capital inflows from the core before the crisis. It was sectors like tourism, real estate and construction that were the pillars of the pre-crisis model. The manufacturing industry fared badly. In Southern Europe, euro zone membership proved to be detrimental to industrial development. Southeast European countries usually retained a national currency. However, there exchange rate policies resulted in overvalued exchange rates, and huge exchange rate credits made currency devaluations very difficult. These type of exchange rate policies were detrimental to manufacturing industries as well. Current account deficits were high – usually around or even above 10% of the GDP.

Though there was a tendency of convergence of per capita GDP between core and periphery, their structural features have diverged more and more. The Single Market approach, the euro and the prevailing exchange rate policies deepened patterns of uneven development.

Mihaljević: What do you see as the dominant tendencies of the post-crisis accumulation regimes in Europe today? What is the current situation in Germany as the most dominant economy and how does it influence situations in other countries (Poland, Slovakia, Czech Republic)?

Becker: German growth has to a significant extent relied on exports. The surplus of the current account has continued to grow. In 2016, it reached 8.6% of the GDP. This is about 3 percentage points more than in the pre-crisis years. The German export surplus is particularly high in trade with the USA and the UK while it has diminished in regard to the Southern euro zone countries due to the austerity policies applied there. In addition, conditions for domestic demand have been a bit more favourable than in the pre-crisis years.

Recently, real wages in Germany have seen an upward trend. However, the German labour market is massively segmented due to the so-called labour market reforms of the Social Democrat-Green coalition headed by Gerhard Schröder. Wages are relatively high in the core enterprises of the export sector where the trade unions like IG Metall continue to be relatively strong. The situation is quite different in service sectors. It is in services that the low wage sector is quite significant. Trade unions face significant problems organising in sectors like retail trade. Verdi, the service sector union, has developed new approaches for organising and campaigning in sub-sectors with many “atypical” workers, often women. While the industrial unions are quite supportive of German neo-mercantilism, Verdi’s position is more nuanced. Similar differences can be observed between Austrian industrial and service sector unions. The labour market is, however, much less segmented in Austria.

The strong German export performance has favoured the recovery in the Visegrád countries since their economies are closely linked to the German export sector. In the Czech Republic and some regions in the west of Slovakia, there is almost full employment now. Trade unions are in a stronger position than in the past and have been able to negotiate substantial wage increases. Companies have even started to look for migrant workers. For example, several thousand Serbs have been employed in Slovakia. Many of them belong to the Slovak minority in Serbia. Most of the migrant workers are recruited through agencies – due to legal restrictions in Slovakia mainly through Hungarian labour agencies. Often, they are paid less than the local workers. There have been cases of backlash against these migrant workers. For example in Voderady, a village close to Trnava with its car industry, a large numbers of residents signed a petition against the letting of a hostel for migrant workers. The mayor declared that the village lacks the capacity for so many people. Competition and fear are behind this backlash.

Housing prices and rents are very high in Slovakia. This is one of the reasons why people from the impoverished regions with high unemployment do not move to the more prosperous western region. The upturn of the economy is mainly confined to that part of the country. The gap between the west of Slovakia and the rest of the country has visibly widened. In the east of Slovakia, I was told: “Bratislava is another world.” But this uneven development is not confined to Slovakia.

It is not only wage increases that have sustained domestic demand. Credit growth has played a role again – this time particularly in Slovakia and the Czech Republic. In Slovakia, it is the extremely low interest rates of the euro zone that stimulate the credit growth. The Slovak National Bank at least tightened the conditions for real estate credits. The Czech National Bank took some restrictive measures as well. At least in that regard, a lesson has been learned from the crisis.

Mihaljević: French and Italian industrial capital, for a long time now, have been faced with low growth rates. Also the largest Italian banks are in deep trouble with bad debt. Are these economies the biggest threat to so-called European stability? What is the difference between these economies and how is the political situation being managed there?

Becker: Both countries have suffered from strong relative de-industrialisation. From 1980 to 2007, the share of manufacturing declined by more than 8 percentage points, even more strongly in France than in Italy. The share of manufacturing in GDP is only just more than 10% in France – considerably less than in Italy. Euro zone membership in combination with German wage deflation policies proved to be detrimental to manufacturing in both countries.

While large corporations prevail in France, small and medium-scale industrial companies are important in Italy. This makes a difference in the possible political dynamics as well. For small- and medium-scale export companies, regaining the chance to benefit from currency devaluation can be an attractive option. In Italy, Lega Nord has campaigned strongly for leaving the euro zone. The Movimento Cinque Stelle is ambiguous on the issue. In Italy, a political momentum for leaving the euro zone might emerge. The problems of the banking sector are basically due to the very long period of stagnation whose consequences have been aggravated by the crisis.

In France, for example, the Front National has been much more ambiguous about euro zone membership than Lega Nord. I’d attribute this to the differences in the political economy of the two countries, particularly to the higher importance of manufacturing in Italy.

Mihaljević: On the other side, the peripheral economies of the eastern and southern European edge seem stabilized if we look at their GDP rates. But Costas Lapavitsas noted that this is the stability of a cemetery. Is this recovery reflected in rising GDP rates in the east (Bulgaria, Romania) and south (Portugal, Spain, Greece) a consequence of the harsh restructuring that drove down wages and pushed for longer working hours?

Becker: A key aim of the austerity policies was to bring down imports through wage cuts and often pension cuts as well. Nothing was done to improve the productive structures. Industry even suffered to some extent from austerity.

In the euro zone countries, the depreciation of the euro has attenuated the pressures on the productive sectors. Tourism is fairly strong. This is the external side. Domestically a loosening or even an abandonment of austerity has favoured recovery. In Portugal, the government of the Socialist Party which is supported by the Communist Party and the Bloco de Esquerda has explicitly broken with austerity policies and reversed some of the earlier policies of the right wing government that was more than willing to fulfil the demands of the Troika.

The right-wing government in Spain has softened austerity as well. Partido Popular has been in almost permanent election campaign mode, and strong austerity policies are not conducive to re-election. Even the Spanish right wants some leeway in budgetary expenditures. In Spain, credits and real estate activities picked up again. Thus, there is some continuity with the pre-crisis growth model based on tourism and construction. And in Romania, the government recently increased minimum wages and adopted rather expansive fiscal policies.

Greece still has to toe the Troika line. This is reflected in the particularly bad growth figures. Although the strong reduction of the country’s GDP by about 25% has finally wiped out the current account deficit because of depressed imports, it has increased the relative debt burdens. Deflationary policies are not suited to deal with debt crises. Not only the Greek government, but also the IMF views the Greek public debt as being unsustainable. Among EU core countries, particularly Germany, unwillingness to cancel Greek debt partially continues to prevail. By adopting a hard line against the Syriza government, the European Commission and the core EU governments demonstrate that they are not willing to tolerate open defiance of the structural adjustment programmes.

It should be noted that the weaknesses of the productive sectors have not been tackled. The structural problems, therefore, continue to exist. Unemployment is still very high in the Southern euro zone countries, particularly Greece and Spain.

Following the German lead, the EU pursues a clearly neo-mercantilist strategy aiming at growth through export surpluses. Whereas the current account of the EU was more or less balanced in pre-crisis years, it has swung into a surplus now. The neo-mercantilist strategy is now confronted with the unwillingness of the US to continue to function as an importer of last resort at the global level. All major economic powers want to achieve an export surplus at the same time. This is impossible and they are poised for trade conflicts.

Columnist's brief CV:Domagoj Mihaljević graduated from the Faculty of Economics and Business of Zagreb University. His research interests include history of socialist Yugoslavia, political economy of transition and the theory of state. He has written for Zarez, Bilten, Slobodni filozofski, the Croatian edition of Le Monde Diplomatique, and Austrian Kusrwechsel.

First publication:The Contradictions of European Capitalism: An interview with Joachim Becker – Part I