Europe's trades unionists have won the argument even if they haven't won the streets

 Last week' pan-european strike was the biggest show of trade union solidarity since the creation of the European Union. 40 trades unions in 23 countries took to the streets in protest at the austerity policies being pursued by European countries under the direction of the IMF and the European Central Bank. The organisers should be very pleased with the response, even though it largely passed Britain by.

The turnout demonstrates that, even though the vast majority of workers in countries like in Spain are not members of trades unions, it is possible to mount an effective protest against austerity across southern Europe at least. However, protest is all it was. This was not a general strike or anything like it, and we shouldn't exaggerate its impact. The EU bureaucrats are not exactly shaken to the core. Nor is Angela Merkel likely to open the coffers of the Bundesbank because of a few clashes with police. The demonstrations will make very little difference to the fate that awaits a generation of young people as Europe languishes in economic depression.

This is despite the fact that in many ways the unions have won the argument. The intellectual case for continuing with the austerity measures in the eurozone has been seriously undermined by the deepest economic contraction in  since the Second World War. Greece's economy has shrunk by 25% since 2009, and the contraction is accelerating: Greece shrank by 7.2% in the Third Quarter of 2012, which is unprecedented in any European country in peacetime. Countries like Spain, where unemployment is now running at 25%, are caught in a ruinous fiscal trap: cuts lead to economic contraction, which leads to more unemployment, which leads to collapse of tax revenues, which leads to more debt and more cuts. It is a vicious spiral the significance of which the northern eurozone countries seem unable to grasp - even though Germany is now beginning to feel the consequences as its exports to the rest of Europe dwindle.

Spanish debt crisis is a crisis for all of us.

     Capital Flight may sound like the name of a new budget airline – in fact it's what happens when a country loses trust in itself. In the first three months of the year, Spaniards exported a total of e100 billion to London, Frankfurt, Paris - anywhere. The biggest flight of funds since records began. Citizens, firms and banks are hedging against the likelihood that Spain will depart the eurozone, crushed by the burden of its sovereign debts. The respected former Spanish premier Felipe Gonzales said last week that “Spain is in a situation of total emergency, the worst crisis we have ever lived through”.

Where did this come from? It was supposed to be Greece that was on the point of departure. Only last week we were all worrying about contagion from a “Grexit” spreading to other Mediterrannean countries. But the contagion seems to be happening before the disease. In fact, there's a possibility the patient may die even before it is infected, because the collapse of Spain – an economy four times the size of Greece – would be curtains for Europe, and probably for the world economy. It's not just too big to fail; it's too big to bail.

What is happening to Spain is similar to what happened to Lehman Brothers in autumn 2008, except on an epic scale. That was just a run on a Wall Street investment bank; this is a run on a trillion euro economy, the fourth largest in Europe. When entire countries go bust the reverberations are felt across the planet.. If Spain restores the peseta – and this is actually being talked about – then it would default on the huge debts owed by its private sector to international banks. They would go bust as a result, causing credit to cease overnight and international trade grind to a halt. There would be runs on nearly all European banks, not just the Spanish ones. Cash machines would close. It's as serious as that.

Grexit is exit for euro.

The European single currency and the Sunday Herald are the same age. Both entered the world on January 1999, a coincidence our first editorial thought highly auspicious. To be honest, while most observers thought the euro was here to stay, they weren't so confident about the fate of the first new Scottish quality sunday paper in over twenty years. Well, the Sunday Herald is still here, but incredibly there are now serious doubts about how much longer the single currency will survive. The great liberal project that was supposed to bind the nations of Europe together in economic harmony seems to have hit the rocks.

The Governor of the Bank of England, Mervyn King, isn't exactly renowned for telling it like it is, but he hit the mark last week when he expressed his dismay at the European Union “tearing itself apart without any obvious solution”. It's as if Europe's political leaders no longer possess the will to make it stop. There is a fatalism seeping through the corridors of Brussels and Strasbourg about the hitherto unthinkable prospect of Greece actually leaving the eurozone. The euro, like diamonds, is supposed to be forever, but last week the German finance minister, numerous central bankers and even the head of the IMF were openly speculating about Greece restoring the drachma. There is talk of a “Grexit” - an “orderly” departure.

It is likely to be anything but. Make no mistake, the Greek people, who go to the polls again on June 17^th, are holding a gun to the head of the entire European financial system.

Sorry guys: the debt has to be paid,

 They don’t call it the dismal science for nothing.  You could forgive politicians of all parties for despairing of economics.  Take the great deficit row.  On the one hand we have all the economic analysts in the City, saying that Britain’s budget deficit is much too high, the largest peacetime deficit in history,  and has to be cut.  If you don’t cut the deficit, then the cost of debt interest will shoot up above £70bn and Britain will have a Greek tragedy. This is why the chancellor, George Osborne, is planning an epic austerity programme in next week’s emergency budget. 

   But on the other hand we have another group of economists, like Nobel laureates  Joseph Stiglitz and Paul Krugman, who say no! no! no! -  cutting the deficit is the last thing we should do. At least not now, while all the EU economies are doing the same thing. The combined austerity programmes will plunge us all back into recession as demand falls and trade grinds to a halt.   Government debt will actually rise because of the increased cost of mass unemployment and the loss of tax revenue.  The latest rise in unemployment yesterday to 2.5 milion suggests that this is a real problem. We were already having a jobless recovery - swingeing cuts in public spending could make it a jobless slump.  Labour’s interim leader, Harriet Harman, tore into the “Tory cuts” at prime minister’s question time yesterday accusing David Cameron of “talking down the economy” for ideological ends. 

     So there you have it: the deficit is going to go up if we cut public spending and it’s going to go up if we don’t cut spending.   Brilliant!  Britain is on the fast track to default, and in a hand cart to stagflation, whatever we do.   Might as well grab a gun and a bag of gold and head for the hills.     Fortunately everyone is agreed on one thing: economic growth is the only way ultimately to bridge the deficit - just as you have to get a job earning good pay in order to pay off a mortgage. Everyone, Labour and Tory, also agrees that the deficit has to come down.  The question is basically one of when and how.  The neo-Keynsians say that you need to keep spending high for the time being to replace the demand destroyed by the downturn/  The fiscal conservatives say that we are already nearing the limits of borrowing and that Britain’s debt crisis will spiral out of control if we don’t convince the bond markets that the government is serious about balancing the books.  After all, our deficit is larger than Greece’s right now, and the about only reason financiers and firms are still buying our government debt is that Britain has a relatively good record of paying it back.

   It’s really a question of just how much debt can we take.  Britain’s national debt is relatively small right now at 60% of GDP  and is scheduled to rise to something like 90% .  After the Second World War,  America had a budget deficit of 120%.  Which was a good thing according to the Guardian’s economics editor Larry Elliott. “Far from being burdened with unpayable debt” he wrote this week, the baby boomers in the late 40’s and early 50’s were the most blessed generation in history”.  Well, some might disagree with the beatification, but what is really wrong with this analysis is that,  er, we aren’t at war,  and hopefully won’t have to be.  

    It’s true that rearmament ended the Great Depression and  America boomed after the war.  But this was largely because the dollar became the world’s reserve currency, and America, on the back of that, became the world’s greatest industrial and military power.  It could dictate the terms of trade, and still does.   War isn’t a get out of jail free card mainly because  it is not possible to replicate the wartime conditions in peace. The government can’t go around freezing bank accounts, seizing property and dictating to industry.  And Britain after the war was a very sorry place indeed,  afflicted by rationing, deflation and manufacturing decline.     I don’t believe that people could go back to that.   

   The peacetime debt record is held by Japan, which is scheduled, according to the IMF, to borrow 250% of GDP by 2015.   But this colossal spend hasn’t been much of a stimulus - Japan’s economy been stagnant since the property crash nearly twenty years ago.  Japan is able to run massive deficits because the Japanese people are fanatical savers.  The British public doesn’t save a penny, in fact we are so addicted to debt that we owe, in personal debts, more than our entire annual national income.  Any way you look at it, Britain simply cannot risk going much further into debt. We are heading for a trillion pound national debt; a trillion pound public sector pension liability piled on top of a trillion pound bank rescue and personal debts of one and a half trillion.  There’s no way of laying this off, pretending it’s not there, wishing it away.    Nor is default, or declaring national bankruptcy, an easy way out because that just raises further the cost of borrowing. 

   I’ve thought a great deal about this issue in the last couple of years, and I’m afraid I have to part company with the neo-Keynsians.  Actually, Keynes didn’t support unlimited public spending and argued for balanced budgets in the 1930s.   The most important political reason for cutting the debt, Keynes argued  is that it will ultimately be paid, not by the rich, but by the working class.  Public spending is unique in that it is paid entirely out of the taxes of ordinary working families or through inflation. 

  These are scary times.  As European countries like Greece and Spain topple under the weight of their own debt, there’s a very serious risk of  a wave of sovereign defaults across the euro zone. These are countries only recently emerged from dictatorship where democracy has yet to be tested by serious economic hardship.  If the politicians here and abroad get it wrong, spending too much, printing too much, devaluing too far, we could end up like Weimar Germany.  And what’s worse, Germany could end up like Weimar Germany too.