An update to Capitalist crisis – theory and practice by Mick Brooks
The crisis of capitalism and the Euro in 2013
The gloomy prognosis for the world economy outlined in the book (Capitalist crisis – theory and practice) has been confirmed. What we see stretching before us is an age of capitalist-imposed austerity. On the other hand revolutionary possibilities are beginning to open up on account of the unprecedented hardships being inflicted on the working class in all the main capitalist countries.
- The crisis began in 2007 in the form of a financial crisis, called the ‘credit crunch’. In fact it was a classical crisis of capitalism.
- By 2008, as the major capitalist powers rushed to bail out the banks at whatever the cost, output dipped and, with it, tax revenues. The inevitable outcome of increased state outlays and falling income was that governments of all political complexions ran deficits. They were spending more than they were getting in. Public debt soared. This fiscal crisis of the state was another manifestation of the crisis of capitalism.
- The crisis then appeared next as a sovereign debt crisis, a particularly severe fiscal crisis of the weakest and most indebted capitalist governments.
- The crisis was compounded by the existence of the Euro. The Eurozone consists of 17 nations of the European Union (EU). They have abandoned their national currencies and adopted the Euro as a single currency. Now the crisis has taken the form of a Euro crisis.
Capitalist competition produces winners and losers, among firms and between nations. Naturally the weaker capitalist countries experienced the greatest economic difficulties and ran the biggest trade deficits. These countries no longer had the option of devaluation as a short term solution to their balance of payments problem. This put pressure on the Euro.
The sovereign debt crisis was particularly acute within the peripheral countries of the Eurozone. They ran even bigger government deficits than the more successful economies as the crisis hit them harder.
In addition peripheral country banking systems were under more strain because they had borrowed from the core net exporting nations and gone into debt to pay for their imports. In effect banks in countries like Greece were being lent money by banks in countries like Germany to lend to Greeks in order to buy German products.
All these problems caused stresses to the structure of the Euro. So, within the Eurozone, the crisis was perceived as a crisis of the Euro. These difficulties have been dragging on for a long time now, and they threaten to drag the rest of the world economy back into recession. So the notion has taken hold that the faulty architecture of the Euro is the sole problem holding economic growth back in Europe and beyond.
This is completely wrong. The Euro was launched in 1999 and worked perfectly well for almost a decade despite its fundamental design flaws. The reason it seemed to work for so long was that the world economy was booming all this time. It was the Great Recession of 2008-9 that opened up the cracks in the structure of the Euro. If capitalism were crisis-free, then no doubt the Eurozone could have carried on indefinitely despite its faulty structure. It is the crisis of capitalism that threatens to lay the Euro low.
Capitalism is a system that runs on profit. At bottom the underlying cause of the Great Recession was a fall in the rate and mass of profit. US profits peaked in the third quarter of 2006, according to the US Bureau of Economic Analysis. (American economic statistics are the best in the world and the USA is still by far the most important capitalist economy.) Thereafter they fell dramatically, and had halved by the end of 2008. This is itself would have caused a crisis, even without the ‘credit crunch’. In fact the fall in profits is the underlying cause of the banking crisis, and subsequent events in the world economy are also unfolding aspects and forms of appearance of this fundamental crisis of capitalism.
The Great Recession is over. The crisis continues. The mass of profits has revived in the major capitalist economies, though the rate of profit remains generally lower than it was in 2007.There has been no new surge of investment that could propel the world economy forward. Upon the onset of recession a period of capital destruction is necessary to restore the rate of profit. But the authorities, by intervening to prop up the banks and other bankrupt capitalist institutions, have delayed that destruction of capital from taking place. Indeed they would argue that the ‘cure’ of firms going to the wall wholesale would have been worse than the disease.
As a result we have experienced, even after the Great Recession ended, a period of stagnation that Reinhart and Rogoff in their book This time is different (Princeton, 2009) and others find typical of ‘Great Depression’ crises. For Britain the present ‘recovery’ (the country dipped back into recession in 2012) is the slowest for a hundred years – worse than 1930-34, 1973-76 and 1979-82.
The Euro crisis
Since the Euro crisis has been the flashpoint of renewed recessionary pressures within the world economy for the past year or so, we concentrate on events in the Eurozone. The Euro is an example of a fixed exchange rate currency. Joining the Euro involves a commitment never to devalue. Devaluation is only ever a quick fix, since the real problem a country faces is a lack of competiveness on the part of home producers (capitalists). But this short term solution is denied to members of the Eurozone – in principle for ever.
Devaluation (a one-off reduction in the value of the currency within a system of fixed exchange rates) or depreciation (a gradual reduction within a system of floating exchange rates) gives a country a temporary competitive advantage. With devaluation or depreciation the native currency becomes cheaper and buys fewer units of foreign exchange than before; home country exports become cheaper for people living abroad, while imports are dearer in the home market. So exports should soar while imports fall.
The Euro is a currency without a nation state to back it up. Countries with their own money have two economic levers which they can try to use to manipulate the level of the currency and to influence the level of economic activity generally. These are fiscal policy (taxing and spending) and monetary policy.
Countries surrender monetary policy along with their currency when they enter the Eurozone. Emissions of Euros are determined by the European authorities, in particular by the European Central Bank (ECB). Moreover the ECB is constrained by various rules which do not restrict the operations of other central banks, such as the Bank of England or the American Federal Reserve (Fed). As was pointed out in the book, control over monetary policy does not mean that the ECB can always control the level of interest rates throughout the Eurozone.
Fiscal policy within the Eurozone is nationally determined. Nation states jealously defend their right as to how much to tax their citizens and how to spend the money. This means that countries in the Eurozone get no help when it comes to transfers from rich to poor and indebted countries.
The Euro produced a clear division between the core countries (above all Germany) and the periphery – Greece, Portugal and Ireland, but also Spain and Italy. The core countries ran trade surpluses with the periphery and lent them money – to keep on buying their exports. The periphery bought more imports than they exported and borrowed from the core countries to pay for imports from Germany and other countries.
So, if countries are unable to devalue when confronted with a balance of payments crisis, how are they supposed to adjust to improving their exports and cutting imports? The only alternative is deflation – cutting the general level of wages and prices in the country so as to improve international competitiveness. This is an extremely protracted and painful process. if it works at all, it works by using the scalpel of austerity upon the whole nation as deliberate policy.
The debt trap
During the boom years after the launch of the Euro, interest rates throughout the Eurozone did tend to converge to a level determined by the monetary policy of the ECB. Government bonds issued in Greece would pay similar ‘returns’ (interest rates) to their holders to those in Germany. This showed that ‘the markets’ (the rich people who buy these bonds and so lend money to governments) regarded both German and Greek government debt as risk free. In conventional financial analysis risk and return are what ‘investors’ weigh up when buying pieces of paper – the higher the risk, the greater the return they will demand.
As the Great Recession rolled on and state debts and deficits rose to dangerous levels, the markets began to factor in risk for the government securities of peripheral countries. They demanded a higher return for the privilege of lending to the Greek, Portuguese and other governments. As a result government debts ballooned further and the distressed countries were paying more and more of their overseas earnings just to pay the interest on the debt.
The debt trap opened up for Greece in particular, just as it has held poor countries in its vice-like grip for decades. Take the example of Egypt. Between 2000 and 2009 Egypt, a desperately poor country, paid $3.4bn more in interest to its creditors than it received from them. This was a direct transfer from poor to rich nations. Despite the fact that Egypt repaid a total of $24.6bn over this period, the debt burden grew by 15% (World Bank – World Development Indicators 1960-2008). In effect the Egyptian people were thrust by the turning of the debt screw down a deep hole from which they could not emerge unless they threw off their debt shackles by revolutionary means.
Greece now faces the prospect of having the same fate imposed upon it – the transition from a middle income to a ‘third world’ country. In thrall to debt and in need of handouts, it is being administered by the troika (the International Monetary Fund, European Commission, and European Central Bank) who in effect rule the country like conquerors. The powers that be have even demanded that Greece rewrite its constitution so as to give priority to the repayment of foreign debt. This arrogance is an echo of the classic colonial era. In 1882 British troops occupied and annexed the whole of Egypt for non-payment of debt. Rosa Luxemburg commented on this:
“It should now be clear that the transactions between European loan capital and European industrial capital are based upon relations which are extremely rational and ‘sound’ for the accumulation of capital, although they appear absurd to the casual observer because this loan capital pays for the orders from Egypt and the interest on one loan is paid out of a new loan. Stripped of all obscuring connecting links these relations consist in the simple fact that European capital has largely swallowed up the Egyptian peasant economy” (Accumulation of capital, p.438, Routledge, 1963)
This is exactly what is happening in Greece. When asked whether a cut-off of loans ordered by the troika would mean that Greek civil servants and others wouldn’t be paid, Syriza MP Panagiotis Lafazanis shrugged, commenting, “The loans basically cover interest payments.”
The case of Greece
At the time of writing the Greek people have suffered five years of falling living standards as a result of austerity policies, with a cumulative collapse of 25% of Greek national income over that period. They face an indefinite future of more cuts and hardship. The economic and political crisis in Greece remains a hot headline issue of the day. Greece’s continued membership of the Eurozone and the future of the single currency itself hangs in the balance.
The newspaper headlines scream lies at us. The first lie is that the bailout is for the benefit of the Greek people. On the contrary, the conditions imposed as part of the bailout are the cause of the people’s suffering. The European Union authorities have shown a cold hearted indifference to the plight of the Greeks. They have no interest in their welfare.
The crisis began as a banking crisis and governments all over the world intervened to bail out the banks. French and German banks in particular had incautiously bought huge sums of Greek government bonds and lent to Greek banks. Now they are in trouble. The so-called rescue of Greece is in fact a further cynical attempt to bail out these banks, the cause of so many of our woes. The banks are the real beneficiaries of the rescue.
We are told that the Greeks are lazy tax dodgers. This is racist abuse masquerading as political analysis. In fact Greek workers put in longer hours than German workers. It is the case that they are far less productive than the Germans. This is not their fault. It is because of a persistent failure by Greek capitalists to invest.
Greek workers in the public or private sector can no more avoid tax than British, German or American workers. Income tax is deducted at source. Value Added Tax is paid every time you buy something. It is true that there is a longstanding culture of Greek millionaires dodging tax. This characteristic is by no means confined to Greece. Companies like Vodafone in Britain are notorious for not paying taxes. Tax dodging is a capitalist characteristic. Greek capitalists have more opportunities to get away with it because of the weakness of the Greek state, that’s all.
So the Greek people in particular are the victims of a crisis of capitalism, not of their own over-borrowing. In the same way working class people in Britain or the USA are not responsible for the crisis (as they are sometimes accused of being) because they accepted loans in the boom years when the banks were literally hurling money at them.
Options for the future
The dilemma facing the European Union (EU) authorities posed by the crisis of the Euro can be dealt with in several ways:
Fiscal union: If the ECB were to issue bonds backed by the authority of the EU as a whole, the money raised could be transferred to any country in the Union. At present fiscal policy (how governments raise their money and what they spend it on) is determined at national level. These Eurobonds would be a big step towards fiscal union, towards turning Europe into one country. The European Union is not united. It is riven by national antagonisms. National governments will oppose any steps towards fiscal union on the grounds that it would take away their power. Fiscal union would be a mighty step towards complete political union.
Muddling along: Given the national antagonisms that have paralysed the decision-making process in the European Union, this has been the easy option so far. ‘Kicking the can down the road’ has been the wearisome cliché in the financial press. The leaders of the EU are determined to hold things together till the German elections later this year. Their thoughts are dominated by short-term trivial calculations rather than grand strategic concerns.
Break up: The single currency must proceed towards fiscal union or it will collapse at some point. At present fiscal union is politically impossible. Yet more temporary fixes are possible to prevent a break up, but it seems that some senior figures in the counsels of the EU are steeling themselves for a Greek default and possible exit from the Eurozone. The consequences of this will be discussed later.
The fiscal compact
The fiscal compact is a new European Union Treaty which has been signed by all the members of the EU apart from Britain and the Czech Republic. It is due to come into force in 2013. It commits its members to maintain a balanced budget. Member countries are allowed to run a maximum government deficit of 0.5 % of GDP and a public debt of 60% of GDP. The fiscal compact has been imposed on the EU at the behest of the German government, whose bourgeois politicians think this is the way to impose fiscal discipline upon their lax-minded partners.
The fiscal compact is insane. Public deficits ballooned open in all the countries both inside and out of the EU with the coming of the Great Recession. This did not happen just because some countries were run by politicians who were weak of will. Growing government deficits and debts were universal. Deficits grew because the inevitable effect of recession is to shrink governments’ tax revenues and force them to pay out more in unemployment pay and other benefits. This is quite apart from the need they felt to bail out the banks at all costs. So governments of all political persuasions began to run deficits and clock up bigger debts. The injunction from the EU not to let it happen is like King Cnut demanding that the waves roll back at his command.
Bizarrely, policing the policy on deficits under the fiscal compact has been left to the European Court of Justice. It will have the power to fine countries that exceed the guidelines. We ask: what will the imposition of fines on countries that are running a deficit on their government finances do to those deficits?
The fiscal compact is a classic policy of neoliberalism. It seeks to place the burden of the crisis onto the shoulders of the working class by attacking wages and the social wage aspect of government spending. So in Britain the Trident nuclear submarine programme is not under threat! The compact commits the EU as a whole to a vicious policy of imposed austerity when it is becoming increasingly obvious that austerity will not serve to right the European economy. It in effect assumes that capitalism always works perfectly (when that is manifestly not the case), and that problems only come about when governments interfere in the smooth workings of the free market.
Naturally this proposition has come under increasing question as years of austerity seem to stretch unendingly before us. Austerity policies are also being resisted in practice more and more by the working class all over the continent.
Angela Merkel and the grey bureaucrats in the top echelons of the EU reject this resistance with contempt. What has democracy got to do with it, they ask? How can ordinary people understand the wonderful complexities of the market economy? The EU ‘doctors’ alone understand that never-ending austerity, mass unemployment and shrinking living standards are all good for us!
All the same, weariness with austerity is growing all over the European Union and beyond. A mood of profound questioning and opposition is in preparation. Millions of workers recognise that austerity is not working to restore prosperity. On the contrary it is spreading misery. They are looking for an alternative.
‘Whatever it takes’
Though the normal reaction to the crisis within the EU has been institutional paralysis, the European Central Bank under its new President Mario Draghi has made attempts to palliate the problem. Draghi realised that something must be done, In July he declared, “The ECB is ready to do whatever it takes to save the Euro and, believe me, it will be enough.” His tone of determination contrasted dramatically with the interminable procrastination of the EU authorities up to that point. For the first time the world heard the plop of fingers being pulled out. Stock markets rallied after his speech and for a time interest rates on peripheral country bonds dropped markedly. The Financial Times proclaimed him person of the year for 2012. So what has he achieved?
The case for Eurobonds
The Greek government has to offer usurious returns on the bonds it issues because the ‘bond vigilantes’ claim there is a danger of default and demand ever-higher rates of return. One way of countering the speculators would be to issue a Eurobond with the finances of the entire European Union mobilised behind it. At present (December 2012) the German government borrows at about 1.3%, while the Italians have to pay 4.6%, and the Spanish state 5.7%. The Greeks have been paying even more outrageous and punitive rates for years now (now less than 12%, but earlier in 2012 they stood at 18%). The Eurobonds would be a risk-free investment with AAA rating. Interest paid would be low, at German levels.
So what’s the problem? The problem is the whole nature of the EU as a multinational capitalist institution. Who would determine how many Eurobonds an indebted country like Greece could issue? The risk is that the periphery would go on a spending spree. This is what the German capitalists are afraid of. So they have imposed their veto. Eurobonds are not going to happen. This is yet another example of how national antagonisms can paralyse the decision-making process within the EU.
Outright Monetary Transactions (OMTs)
In September 2012 Draghi launched a policy called Outright Monetary Transactions (OMTs). The idea is for the ECB to issue Euros in order to buy national bonds that are coming towards maturity. The intention was to cut the usurious interest rates which prevented peripheral governments from ever paying off their debts.
Governments issue the bonds as a way of borrowing money to pay their national debt. They issue the bonds at a discount, which is effectively interest paid on the loan. The bigger the discount on the face value of the bond, the higher is the effective interest rate. As we saw earlier interest rates paid by different countries within the Eurozone have moved wildly out of kilter and for peripheral countries have become an impossible burden.
Operating on basic supply and demand analysis, Draghi reckoned that if the ECB bought peripheral country state bonds, the increased demand would raise bond prices and so reduce the effective interest rate paid. Draghi insists that OMTs are not the same as the Quantitative Easing (QE) practised by the US Fed and the Bank of England, whose aim is to print money and (they hope) purchasing power. Draghi claims that OMTs would not inject liquidity into the Eurozone economy. The ECB would not be printing money.
There was just one problem – the same problem that has stymied successive co-operative attempts to get out of the crisis. National antagonisms, and particularly the dominant role of Germany, meant that the ‘lucky’ country getting this form of relief would have to agree to ‘conditionality’. Speaking in plain English, the country in question would have to sign up to harsher austerity policies that would make economic recovery impossible.
The right wing PP Spanish government found itself in paying exorbitant rates on its borrowing in the second half of 2012. But it did not apply for OMTs, partly because it would involve a national humiliation, but mainly because the further austerity demanded as the price could be the straw that broke the camel’s back. OMT remains a shot in Draghi’s locker but it has never actually been tried.
The long term refinancing operation (LTRO)
Draghi found he could also lend to European banks in case of emergency. Whereas OMTs were intended to bail out indebted governments, this scheme was intended to save the banks.
He launched the long term refinancing operation (LTRO), a European-wide expansionary monetary policy. LTRO was quite dramatic in its impact. The ECB succeeded in lending a trillion Euros to commercial banks in just three months! The ECB lent at a very low rate of interest – 1%. Then the European banks bought national government bonds with the loan. In the case of Spanish and Italian banks they got a return of more than 5%. This was entirely risk free. It was money for old rope. But there were dangers to the wider economy, even if the banks were saved for the time being. In effect insolvent banks were given the money to lend to insolvent nation states.
The effect of banks entering the market and buying government securities was to reduce the interest rates that the governments had to offer in order to borrow money to finance their debts. Spanish and Italian borrowing was getting perilously close to a danger level. Above an interest rate of about 7%, more and more government revenue is swallowed up in servicing the state debt, and the country enters the sort of death spiral we see so clearly in Greece.
Unfortunately the effect of LTRO was small and short lived. As soon as it was abandoned Spanish and Italian government interest rates spiked up again. Why was the policy abandoned? First LTRO seemed to be pouring money into a bottomless pit. Secondly national antagonisms to the policy, particularly the objections of the German Bundesbank, caused its withdrawal.
But the fundamental reason why LTRO didn’t work was because the banks were busy deleveraging, winding down loans and rebuilding their assets. Martin Wolf reports (Financial Times 25.04.12) that, “58 large banks based in the European Union could shrink their balance sheet by as much as 2trn Euros by the end of 2013, or almost 7% of total assets.” But households have been responding to the crisis in exactly the same way. If everyone saves and nobody spends, the economy can enter into a deflationary spiral.
The banks behaved as they did because they were privately owned. Even state-supported banks were permitted to cock a snook at the urgent needs of the population for credit. Only public ownership and control of the banks run as a public service under a government determined to build a better, socialist society could change that.
Another attempt to resolve the crisis was the first tentative step towards a banking union. This is conceived as proceeding in three stages.
- First it is necessary to set up a common supervisor operating out of the ECB. This is the easy bit. The supervisor will develop a single rule book for all the big banks in Europe, covering such issues as the amount of capital they have to hold to be regarded as safe, and the procedure to adopt if they need to be bailed out.
- Proceeding from the single rule book the leaders need to develop a common resolution authority. In the event of a banking crash in one country, the full force of EU finance will be mobilised to stop the infection from spreading. This involves other countries reaching into their pockets. It hits the same iceberg as all the other proposals – the determination of nation states to hold on to their power and their unwillingness to bail out trading partners they do not trust.
- Finally the authorities need to develop a European-wide deposit guarantee scheme, aimed at preventing bank runs, such as brought down Northern Rock in 2007-8. At present deposit guaranteed schemes are administered nationally. Once again the fearful prospect is posed of one country paying to bail out another. Even if that is really in their common interests, each nation state will look to everyone else to save the day first.
So a banking union, like a full fiscal union, will mean a transfer of funds from one country to another. Potential payers were bound to protest. The opposition of the German Bundesbank in particular means that only about 100-200 of the biggest banks (those worth more than 30bn Euros) out of a total of 6,000 banks in the Eurozone will be covered by the accord. Germany, which has many small regional banks, would be largely outside the regulatory framework, while the big French banks would be caught by the rules.
All the measures intended to return the EU to economic health are stymied by a permanent feature of the European Union; the inability of capitalism to overcome the constriction of the nation state that it has outgrown. In fact, for all his bombast, Draghi has been unable has been unable to shake the EU out of its torpor. As Wolfgang Munchau commented (Financial Times 17.12.12), “The role of the OMT and the banking union is to keep up appearances.”
The European Stability Mechanism
The European authorities belatedly realised that the bond markets could bring down the entire European ‘project’. They needed a ‘big bazooka’, an enormous rescue fund to convince speculators they could not win against the Euro, and to bail out member states and their banks if in trouble. The alternative would be for the forest fire to spread throughout the EU and destabilise the entire world economy. The European Stability Mechanism (ESM) is to come into operation in 2013. Applicants for a bailout have to go to the troika, the same body that has placed Greece on a bed of nails for the past four years. The troika descends upon debtor nations and reads them homilies about cutting their coat according to their cloth. In practice this means imposing the burden of adjustment upon the working population. The troika imposes savage cuts as the cost of its ‘support’.
The usual unedifying quarrels between the warring brothers within the EU meant that the ‘firewall’ of the ESM was a long way from being fireproof. The funds it can lay its hands on in time of difficulties have been whittled down to 500bn Euros, at the behest of the Bundesbank. That would definitely not be enough to rescue Spain or Italy from the bond markets. The front page headline in the Financial Times on 15.05.12, ‘Faith fades in euro firewall’, says it all. So far from being a big bazooka, the ESM is just a pea shooter.
The failure of austerity
It is quite clear that the policy of giving the overriding priority to cutting the deficit at all costs has failed. When we say that it has failed, we mean that it is not restoring the capitalist system to sustained growth, full employment and ever-increasing prosperity.
That is not the ‘aim’ of capitalism: is not the maximisation of happiness, or even of Gross Domestic product (GDP); it is the maximisation of profit. Since capitalism is a system where production is for profit, the purpose of austerity policies is to cut the wages and social wage of the working class in order to boost profits, not to return us all to full employment and prosperity.
But, even in its own terms, the effect of austerity is contradictory. To take the case of the UK, more than 380,000 public sector jobs have already gone. Infrastructure spending has collapsed by 25% over the past year. But government borrowing continues to rise and, if the deficit has narrowed, the reason is for that is tax rises, not cuts. In fact more than 80% of the intended cuts have not been implemented yet, though already the working population groans under the burdens imposed upon it by the Tory-led government. There is no end in sight.
What capitalists need in a crisis are profitable markets. Cutting the market in a crisis in order to raise profits can push capitalist firms teetering on the edge into bankruptcy. This can be seen most clearly in the case of Greece. As the economy collapses, firms go bust and stop paying taxes. Since the government is losing revenues it can’t pay its bills and now has mounting unpaid debts with private contractors. So attempts to cut the deficit can actually serve to keep it at an unsustainable level. Greece had a million companies in 2009. A quarter have since closed while a further 300,000 don’t pay their workers on time. The Greek economy is spiralling down into a chasm.
How can a nation escape from the debt trap? The huge wartime debts after the Second World War of ‘victor’ countries such as Britain were eventually scaled down. Britain emerged from the War with a national debt of 250% of GDP. But it was economic growth that allowed the debt to be paid down over time. This was not because governments after 1945 consciously decided to go for growth, rather than paying off the deficit, as some critics of austerity argue should be done today. On the contrary the state can do little to influence, let alone determine, the rate of growth in a capitalist economy. The post-War boom was not planned and implemented by governments. It happened because the laws that govern the accumulation of capital were functioning in a uniquely favourable environment. The golden age of 1948-73 will never recur. The economic perspectives before us are unremittingly bleak. So the problem of government deficits will not just disappear.
In the case of Greece, the Financial Times leader (22.02.12) argued: “Greece’s deficit reduction is off track largely because of a depression caused in part by the global slowdown and mostly by the programme itself.” Austerity may be self-defeating; but that doesn’t mean the capitalist class will automatically abandon the policy. It may not ‘work’, but they will persist with the policy unless they are knocked back by the struggles of the working class. It is their natural reaction, the only way they can unload the burden of the crisis on to the workers.
An extreme illustration of the pressures of an austerity programme is provided by the case of Portugal. David Bencek, analyst at the Kiel Institute for the World Economy, estimates that Portugal needs to run a primary surplus (a surplus that doesn’t include interest payments) on its budget of 10% of GDP for the next few years to reduce its debt to manageable levels. Clearly that is an impossible burden to bear.
For Portugal, Ireland, Greece and Spain the ratio of debt to GDP has increased every year since 2008, despite desperate attempts to economise. This shows that austerity is actually a tourniquet that cuts off the life flow of blood round an economy. Greece has cut and cut yet it still runs a deficit on government spending. It is like the labour of Sisyphus, condemned forever by the gods to roll a huge boulder up a hill, only to see it slipping down again after all his efforts.
Greece’s plight in 2013
In Greece yet another bailout was negotiated in 2012. As usual it imposed further hardships upon the Greek people. And yet the bailout was correctly billed as the biggest debt default in history. By the time of the latest bailout the Greek public deficit had ballooned to 166% of Gross Domestic Product (GDP). The plan was to reduce it to 120% by 2020 (still a crushing burden)! Thirty billion Euros in new money was to come to the rescue.
The vast majority of this cash went to rescue the European banking system, not the Greek people. Private holdings of Greek assets by foreign banks were transferred to the ownership of international financial institutions. The bailout has allowed private banks in Europe to wriggle out of some of the obligations they took on when they lent to Greece. Hardly any of this huge injection of cash went to ordinary people in the form of wages and benefits. Instead their living standards got a further squeeze.
But for the first time some of Greece’s debt was actually to be written off. There was a write down of billions of Euros in securities held by Greek and European banks (the actual amount is subject to haggling).
This had a paradoxical effect on the Greek economy. Though it reduced the intolerable debt burden, it also wiped out elements of Greek workers’ pension schemes and assets held in Greek banks (both of which were invested in Greek securities). This leaves Greek banks on life support. Their vaults are now stuffed with ‘assets’ in the form of Greek government debt, which could prove worthless.
This was an orderly default managed by the powers that be as the least worst option in the situation. We advocate a unilateral default by the Greek people. Let us be quite clear; that would challenge the power of capitalism that is grinding down working class living standards in Greece and all over the world. The capitalist class knows that. It will respond accordingly.
European banks have continued to withdraw their funds from Greek banks since the bailout. In this uncertain atmosphere Greek citizens also began to withdraw their cash and hoard it. Billions of Euros have disappeared from the vaults of Greek banks over the past year. This is a slow-burning run on the banks (called a ‘bank jog’). Panic can feed on itself. As Mervyn King, the governor of the Bank of England noted during the Northern Rock crisis in the UK in 2007, “Once a bank run has started, it is rational to join in.” The Greek banks are insolvent. Foreign banks have been running down their holdings in Greek financial institutions for months, making the situation worse. Any shock can push the banking system over the edge.
In June the parties that supinely supported the Greek austerity programme imposed by the terms of the bailout were knocked back in the elections. The real victor was the left wing coalition Syriza, committed to a clear anti-austerity programme involving renegotiation, and if necessary repudiation of the debt. From being a fringe party with less than 5% of the vote in 2009, Syriza gained 27% support. They were just pipped at the post by the right wing New Dimokratia, which went on to form a government committed to impose yet more austerity.
The 2012 bailout solved nothing. Greece remains on the critical list. Inevitably, resistance is growing.
Spain seems to be next in the speculators’ cross hairs. Though it is true that Spanish banks were quite heavily regulated (they were not permitted to dabble in dodgy American derivatives for instance), that did not stop the debacle. The reason is not far to seek. Capitalism is an unplanned system. It is quite obvious now, as we survey the carcases of empty unsold and half-built homes all over Spain, that the crazy housebuilding boom was unsustainable. Yet all the banks knew at the time was that this was a boom they had to be part of. House prices are still falling in Spain, down 21.7% from the 2007 peak, and experts think they have a long way further to drop. More than half Spain’s young people are unemployed.
Also Spain has a federal constitution which gives wide powers to regional governments. This was created as a concession to national minorities and depressed regions after the demise of Franco’s highly centralised fascist regime. These regional governments are not going to automatically obey instructions from a right wing PP government in Madrid that they oppose to rein in their spending. They will do their best to look after their own, and, in these depressed times, that means running budget deficits, even if and especially if the regions are effectively bankrupt.
Spain is said to have a two tier banking system. Some Spanish banks, such as Santander, are internationally known. (So was RBS; so was Lehman Brothers of course.) But the banks most in peril are probably the regional cajas (savings banks), which are tied up with local government and, in many cases, with the construction industry. For instance Bankia was a conglomerate formed from seven cajas and floated on the Spanish stock exchange in 2010. With losses of an estimated 120bn Euros (its finances are murky) it had to be rescued by the Spanish government in the first half of 2012, for fear of wider repercussions from its collapse.
The danger of contagion
Nobody knows whether the Euro will survive. In the past its permanence was taken as an act of faith by the EU authorities. That confidence is now gone. Narrow calculation suggests that the Euro could survive a repudiation of the Greek debt. But the chaos associated with debt cancellation could cause contagion that drives the world economy back into recession. That in turn could lead to the breakup of the Eurozone and the destruction of the single currency.
The toxin that caused the credit crunch in 2007 was the sub-prime mortgage scandal. Sub-prime (rotten) mortgages were only issued in a few states of the USA. They were diced up, incorporated in dodgy derivatives, sold all over the globe, and incorporated into bank assets. In so doing they poisoned the entire world monetary system and had repercussions all over the planet. That’s the magic of the world division of labour imposed under capitalism! In the same way a disorderly Greek default or the exit of Greece from the Euro could be the first in a row of dominos to go down in the world economy.
In the first place a default would put enormous pressure on European banks. The world banking system is a complex skein of interdependence. British banks, for instance, are not heavily exposed to Greek finance, but they have invested heavily in French and German financial institutions, which are tied to Greek debt up above their necks. In addition Britain is the most indebted country of all the major economies. A bank collapse, or even wobble, could have knock-on effects on consumer debt and state finances. Adding together household, corporate and government debt the UK owes 507% of its GDP in 2012. Nowhere is safe.
Secondly, having claimed a scalp in Greece, the bond vigilantes would really go on the warpath. This is called contagion. Where would they strike next – Portugal, Spain or Italy? The real economy in Europe is very weak. Another financial atom bomb like the collapse of Lehman Brothers in 2008, which took us within a whisker of the destruction of the entire world financial system, could lay the whole continent low. This would have reverberating effects on the rest of the world economy.
Trade is another connecting rod that spreads the crisis from country to country. An economic collapse in a country’s trading partners is bad news. It hits exports. The Tories in Britain are already blaming recession on the continent for Britain’s poor economic performance. Actually their complaints are premature. If a Greek collapse, or any other dramatic disaster, hits the Eurozone then that will have incalculable effects on the British economy and beyond.
Can the Euro survive?
Since the autumn of 2012 the fate of the Euro has seemed a little more secure. There have been no major speculative flurries against peripheral countries. Draghi’s activism at the ECB seems to have encouraged the international financial markets though, as pointed out earlier, none of his schemes are a solution to the Euro crisis. The interest paid on peripheral country government bonds remains punishingly high, an indication of continued insecurity in the markets and a continued fear of default. In short the future of the Euro is balanced on a knife edge.
In Capitalist crisis – theory and practice we discussed the prospects in The fate of the Euro (Part 7.2):
“The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century…The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable…Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book.”
Many have predicted the imminent demise of the whole Euro project. The cautious prognosis in the book seems to have stood the test of the following eighteen months, and points to the travails ahead.
There are signs that the Euro could survive – for now. The permanent weakening of the world economy provided by the Great Recession means that the Eurozone will have to endure financial storms again and again in the future. The crisis of capitalism has produced two interrelated problems in the EU’s periphery:
- A gigantic national debt and deficit owed by the government
- An insupportable trade deficit, particularly with other countries inside the EU.
The only solution for this offered within the framework of a fixed exchange rate system is deflation – pulling your belt in. This has actually had some effect in improving the economic position of peripheral countries such as Greece.
On account of successive ferocious rounds of cuts Greece now has a primary budget surplus (a surplus that doesn’t include interest payments) for 2012. In other words the only reason that Greek government debt is still growing is because of interest rates – or rather paying interest rates upon interest rates. Greece’s primary budget surplus is 2.3bn Euros for January-November 2012, compared with a deficit of 3.6bn Euros in the first eleven months of 2011. Quite a turnaround – though not enough to satisfy the exactions of the country’s foreign creditors.
Greece’s trade gap has also shrunk markedly, proving that if you make people poor enough they will buy less imported goods. The balance of payments has also been transformed in Spain and Ireland and is improving for Portugal and Italy. Unit labour costs have fallen by 7% in Greece, Spain and Portugal, and by 18% from their peak in Ireland in 2007. In other words the ‘cure’ consists of cutting wages in order to boost profits.
We cannot be sure if the Euro will survive the present downturn. The immanent tendency of capitalism to go into crisis, together with the faulty architecture of the single currency, means that the existence of the Euro will be put to the test again and again in the future.
Can’t pay, won’t pay!
The immediate flashpoint for the world economy remains Greece. Polls show that a big majority of Greeks want to stay in the Eurozone. But they can’t pay and won’t pay the monstrous debts imposed upon their nation. This is a correct and healthy instinct. The Greek people correctly see the debt as the enemy that is impoverishing them. They need a revolutionary government that will move decisively to cancel the debts. That would involve capital controls and the nationalisation of the banks, which are effectively bankrupt in any case. No country in the world needs its banks to be run by a bunch of unaccountable speculators. Finance should be the servant of the people, not its master.
Does that mean that negotiations between a Syriza-led government committed to alleviate the debt burden and the EU authorities would be all a matter of bluff and double bluff, as Syriza’s leaders suggest? It is true that the two sides would be measuring each other up to test the other’s determination. The establishment would pile tremendous pressure on the Greek people, threatening them with catastrophe – as if that is not what they already confront. Syriza’s hope is that, on taking office, their opponents would blink first in this game of poker.
The outcome of such a standoff would be uncertain. It would depend in part on whether the EU authorities are prepared to make concessions at the last moment to save the European ‘project’ – for the time being. Even if they did, that will not be the end of the story.
The EU treaty covering entry into the Euro is quite clear. Formally there is no procedure for Greece or any other country to leave the Eurozone (Grexit). There is certainly no way that other member states can expel one of their number.
But for now the EU authorities want the Greeks to take their nasty medicine. If they don’t, they can see the Portuguese, the Irish, the Spanish and the Italians all queuing up for preferential treatment. The troika has already shown that it is quite prepared to play hardball if it sees the existence of the Euro, to be under threat. As Wolfgang Munchau puts it (Financial Times 14.05.12), “Technically, the European Central bank could decide not to accept Greek bonds as collateral. It could refuse to grant a request for emergency liquidity assistance. Greece would then have no choice but to leave ‘voluntarily.’ But this would be an incredibly hostile act.”
Indeed it would be a declaration of economic war. Faced with a unilateral default, one led by a movement of the Greek people from below, they would be quite prepared to expel or winkle Greece out of the Euro, whether that is legal according to EU treaties or not.
It would be a mistake by the radical left in Greece to make exit from the Euro its main demand. Greek workers would naturally ask the question, ‘why leave the Euro?’ If the parting of the ways in the form of expulsion from the Eurozone comes because the Greeks repudiate the debt, then the EU authorities will have put themselves in the wrong. Socialists in Greece should strive always to put the representatives of capitalism in the wrong and keep them there.
We don’t know how damaging the expulsion of Greece from the Eurozone could be. The early signs are that, if Greece falls, Portugal, or Ireland, or Spain or Italy would be next in the speculators’ firing line. Greece has only about 2% of the GDP of the Euro. But the knock-on effects could be enough to throw the whole of Europe back into recession. Another recession, so soon after the last serious collapse, could in turn cause permanent scarring to the European and the wider world economy.
How to fight back
The question for socialists is not – can the Euro survive? We have no control over that. What workers want to know is – how can we bring this nightmare to an end? The international capitalist class is striving might and main to make sure that Syriza or some other anti-austerity alliance don’t form a government commitment to repudiate the debt. At present the Greek working class is the advance guard of the movement against capitalist austerity.
The united pressure of the capitalist media can have an effect on the consciousness of the mass of the population, unless it is being argued against in every workplace and neighbourhood. The Greek people have been taken to the abyss and invited to stare over the edge. At least that is how the leaders of Pasok and ND, who have betrayed their people so shamefully, put it. They play upon fear of the unknown. They also warn (or rather threaten) that if Greece refuses to sign up to the bailout terms, the flow of international funds will be cut off. Civil servants and other public workers will simply not be paid. These are powerful arguments that can sway people unless they are countered with steely clarity by a mass mobilisation.
We support the demand for the complete cancellation of the debt. Indeed we believe that to be a precondition for freeing the Greek people from debt slavery to international finance capital. Such a measure would have to be supplemented by taking over the Greek banks and imposing severe capital controls to prevent the capital flight that is already happening. It would be the beginning of a social revolution that could spread across Europe and beyond.
Dithering at the top, resistance from below
Amid the crisis there are frictions and arguments within the senior counsels of the EU. The election of President Hollande and the Greek votes reflect a growing electoral weariness with austerity policies all over Europe – particularly when it is becoming increasingly obvious that they are not working. These arguments also reflect national antagonisms within the EU, and an increasing resentment at the dominance of Germany in the decision-making process. After all German capitalism is pursuing its own interests through the institutions of the EU; as a net exporter and creditor country these don’t necessarily coincide with those of all the other member states.
How intelligent and farsighted are the capitalists’ representatives within the counsels of the EU? Since the ruling class internationally do not all have common interests, and since capitalists work by instinct rather than according to a rational plan, there is massive scope for disagreements. The capitalist political process itself reflects this. It often rewards those best able to plot, manoeuvre and cobble together coalitions of interests solely concerned to hang on to power instead.
Even so, the EU decision-making process is hopelessly flawed. The survival of the Euro is not, and never was, a matter of pure capitalist economic rationality. No such thing exists. The Euro’s future will be the outcome of a complex interaction of political and economic factors. We predicted in the past that ‘on balance’ the Euro should survive as the world economy slowly revived. This was not a hard and fast prediction. Perhaps we underestimated the collective stupidity of the EU authorities! In any case at the time of writing the Euro’s survival hangs by a thread.
This is not just a Greek crisis. It is a crisis, both economic and political, of world capitalism. Millions of workers all over the world are suffering hardship as a result. They see no way out at present; no major force is offering a clear way forward. So they are disoriented and angry. They are in the process of seeing through the lie that, after one further round of belt tightening, they will finally reach the sunlit uplands of full employment under capitalism. The polls all over Europe in particular show electoral weariness with never-ending austerity. Big protests, strikes and demonstrations are the order of the day. In this context a defiant movement of the workers in Greece or anywhere else could generate a huge movement of solidarity from the world’s working class. It is high time for a clear break with capitalism and its policies of austerity.