Friday, June 3, 2011

Europe: a line of dominos

Proletarian issue 42 (June 2011)
Recent developments show economic crisis is deepening
Turmoil in Europe and the US.
The first five months of 2011 have seen some major events demonstrating the aggravation of the worldwide economic crisis, notwithstanding a few minor rays of capitalist hope that tend to be quick to peter out.

We have seen Portugal finally forced to seek an EU/IMF bail-out after several months of doomed resistance, and Greece is rapidly heading towards a default that its EU guarantors are going to have to cover. Meanwhile, the US’s economic outlook has been downgraded by credit ratings agency Standard & Poor’s (S&P), and the country’s policy-makers are so locked in battle over how much the rich can be asked to contribute through their taxes toward paying for the crisis that in April the US government came close to not being able to agree a budget.

In the meantime, whether the rich contribute a few bob or not, it is the poor, on both sides of the Atlantic, who are being squeezed the hardest – in terms of job losses, wage and pension cuts, public spending cuts and the rising price of essentials.

The debacle in Europe

Countries that are doing well in Europe, in particular Germany and France, which appear to have been able to keep their heads above water, increase exports somewhat and in the first few months of this year actually register a fairly respectable rate of growth of GDP (Germany 1.5 percent for the first quarter and France 1 percent), resent the fact that in having to contribute towards the bail-outs, they risk sooner or later putting their own economies on the line. If Greece, Ireland or Portugal actually reaches the point of default, then the remaining eurozone countries are going to have to make good the losses that their creditors would otherwise incur.

In the meantime, even if the likes of the Daily Mail are screaming that the eurozone bail-out is costing “every family” in the country £500, in actual fact it is only a loan, and a loan at a hefty rate of interest. ‘Every family’ would only be down £500 if, without paying any interest, Greece, Ireland and Portugal all failed to repay any of this debt to the EU at all, which is not at all probable. (‘EU bailout bill is £500 per family: total soars after Osborne agrees Portuguese deal’ by Tim Shipman, 17 May 2011 – note how readily the Daily Mail assumes that lending banks’ losses will end up being paid by wage workers.)

Moreover, Ireland and Greece have been paying huge sums of interest for some time now:

The Irish government’s 10bn euro interest payments are projected to absorb 80 percent of the government’s 2010 income tax revenue. This is beyond the ability of any national government or economy to survive. It means that all growth must be paid as tribute to the EU for having bailed out reckless bankers in Germany and other countries that failed to realise the seemingly obvious fact that debts that can’t be paid won’t be. The problem is that during the interim it takes to realise this, economies will be destroyed, assets stripped, capital depleted and much labour obliged to emigrate. Latvia is the poster child for this, with a third of its population between 20 and 40 years old already having emigrated or reported to be planning to leave the country within the next few years. ” (‘Will Iceland vote “No” or commit financial suicide? by Michael Hudson’, Counterpunch, 9 April 2011)

In other words, for the moment in the bailor countries ‘every family’ (in the sense of the bourgeoisie) is in fact winning – at a horrendous expense to ‘every family’ (in the sense of the working class) in the bailed out countries! In the meantime, the refinancing guarantees provided to the eurozone countries enable them all to borrow on the world money markets at relatively affordable rates of interest. One effect of this, as Donal O’Donovan noted earlier this year, is that:

The European Commission will book a hefty profit on its bailout loan to Ireland after it raised €5bn at an interest rate of just 2.59 percent yesterday by selling bonds.

The EU will lend the funds to Ireland at an interest rate of 5.51 percent ... ” (‘EU to book a hefty profit on Irish bail-out’, Irish Independent, 6 January 2011)

Of course, when governments are inflicting severe cuts on their own people, like the £80bn cut in public spending in the UK, which is costing thousands of jobs and slashing essential public services, it would not play well with a hard-pressed electorate were the government to be forced to hand over further billions to repay the various loan sharks who have been financing the weaker European economies at astronomic rates of interest. ‘Let them take a haircut’ is a cry reverberating throughout Europe.

It turns out, however, that the loan sharks in question always include the banks and pension funds of the countries contributing to the bailout funds. For instance, in Germany, there is a considerable public outcry against contributing to bailing out Greece, Ireland and now Portugal, and Angela Merkel’s coalition government has as a result been sliding significantly in the approval ratings and would find it difficult to get re-elected.

What the German public tends to overlook, however, is that German banks are owed €28bn by Greece, €28.7bn by Portugal, €114.7bn by Ireland and €146.8bn by Spain. If the worst came to the worst, German banks would receive large contributions from all other relatively solvent European countries towards indemnifying their banks for their losses.

In contributing towards bailout funds, the various European governments, including the UK, are mainly acting to safeguard their own banks. When the UK agreed to contribute to the European Financial Stability Mechanism, Ireland needed to be rescued to the tune of over $100bn, and British concerns held $149bn of Irish loans. To lend a further £7bn at a high rate of interest to ensure repayment of those $149bn seems a grand bargain!

Indeed, Wolfgang Münchau argues in connection with the German banks that “On my calculation, the cost of a Greek default to the German taxpayer alone would be at least €40bn ($58bn), including recapitalisation of the ECB. A bail-out would be cheaper. ” (‘The eurozone’s quack solutions will be no cure’, Financial Times, 25 April 2011)

It might, of course, be countered that if all these billions were not being lent out, the money could be spent at home to preserve public services and save jobs. This is true in the short term, but a major source of income for UK plc is interest derived from money lending and the profits derived from investment. To the extent that money is spent rather than invested, future income is reduced. It would be like a farmer’s family eating the seed corn needed for next year’s planting.

Undoubtedly, when socialism is established in this country, industry will be revitalised and become once again the major source of wealth, but so long as the UK is an imperialist country it is ever more and more parasitic, dependent on maintaining high levels of investment income, ie, superexploitation of the oppressed countries of the world.

It is also true that, sooner or later, haircuts will definitely be forced on the creditors of the most indebted countries. Despite bail-out guarantees, the cost of Greece’s borrowing has skyrocketed to a level that cannot be met, even as the harsh conditions imposed by the EU and the IMF have caused Greece’s economy to shrivel even further:

Greek government 10-year debt is trading with a yield around 14 percent, surpassing the peaks seen during the country’s €110bn bail-out last year. The nation’s weak economy, hobbled by a severe austerity programme, means it is seen as an impossibility that Greece will manage strong enough growth to support a debt equivalent to 144 percent of output.” (Emma Rowley, ‘Greece forced to pay sky-high rates to borrow’, Daily Telegraph, 20 April 2011).

It doesn’t take a financial genius to conclude that the odds are heavily pointing towards Greece before long being forced to say ‘Can’t pay, won’t pay’, with the result that Germany, France, Britain and others will have to bear the loss – a loss which will certainly be passed on to the taxpayers.

However, if the debts were not guaranteed and there was a shortfall on what banks could collect of the money owed to them, we know that bourgeois governments are unlikely to allow bourgeois banks to fail, and that therefore those losses are passed on to the taxpayer anyway. It is the wage earners and those who rely to any extent on services provided through public expenditure who pick up the bill every time.

The US maxes out its credit cards

Squabbles between Republicans and Democrats almost prevented the American House of Representatives from setting the national budget.

Both parties agree that the response to the crisis is that there should be draconian cuts to the public-spending budget, but, egged along by the right-wing Tea Party showmen, the Republicans demanded even higher levels of cuts than the Democrats were already willing to inflict on the US public. After all, these cuts would be effected while Obama is in office and, as a result, it is Obama who would get the blame, even though it would have been at the insistence of Republicans that the budget was trimmed to such a drastic extent.

As it is, an eleventh-hour deal was reached. The Republican demand for cuts of $61bn, which passed through the House of Representatives in mid-March, was countered by a Democrat offer of $33bn. Weeks of haggling took place, with the threat of the government having to shut up shop for want of cash hanging over the parties.

Had the budget not been agreed, there would have been no money to pay 800,000 government workers (only emergency workers, prison officers, air traffic controllers, law enforcement officers, border control officers and the like would be spared). Even the military would not be paid, although they would continue their operations and still be earning. However, museums, passport offices, health centres, the tax offices etc would all have had to cease to function.

At the last moment, the cuts were finally agreed at $37.8bn, which the Republicans gleefully hailed as the largest real dollar spending cut in US history. Apparently, in the US, decimating public services makes you popular with the electorate (bearing in mind that the electorate is restricted in certain states, which, for example, permanently disenfranchise people who have been convicted of felonies, a category into which huge numbers of working and oppressed people fall in the ‘land of the free’, where more young black males are in prison than are in college), at least among those who bother to vote.

However, agreeing the budget is far from the end of the story. In spite of massive cuts in public expenditure at the level of individual states, overall the US has continued to increase its budget deficit in the hope of stimulating the economy.

According to Liam Halligan, “Total debts matter even more than annual deficits and on that score America is almost uniquely ‘in the hole’ – with liabilities, including Medicare, Medicaid and social security obligations, amounting to around $75,000bn (£45,000bn), or a stunning five times annual GDP.

It is a testament to the delusion – and plain dishonesty – which surrounds America’s fiscal debate that this figure is not more widely cited. Almost all US politicians and pundits spout the official line that sovereign debts are 59 percent of national income, rather than 500 percent. But, then again, their UK equivalents maintain that our national debt is 76 percent of GDP – again, a fraction of the genuine total. ” (‘America appears to be sleepwalking towards disaster – does no one care?’, (The Telegraph, 24 April 2011)

It is in these circumstances that, in mid-April, rating agency Standard and Poor’s put the US government’s AAA credit rating on ‘negative watch’. Nobody believes that any credit-rating agency would actually reduce the US credit rating, however dire US finances. It seems rather that the agency is working hand-in-glove with the US government to frighten people into passive acceptance of Obama’s proposed deficit reduction measures, including some that are unacceptable to Republican die-hards, such as slightly increasing tax on the wealthy and slightly reducing military expenditure.

In the meantime, the US reached its legally mandated $14.3tr debt ceiling on 16 May (some $46,000 for every American man, woman and child). This means that between now and 2 August another round of horse trading between Democrats and Republicans must be engaged in so as to get the debt ceiling lifted. If negotiations fail to reach agreement by 2 August, the US will actually default on payment of its debts.

It seems improbable that this will be allowed to happen, however hard the two parties seek to score electoral points off one another, but we can expect another cliff-hanger.

No comments:

Post a Comment

Comments