We are being reassured that the financial crisis gripping Greece cannot reach Britain. Many facts and figures are provided to back this up. However, a closer look at the situation reveals the real underlying financial crisis that sooner or later must surface in Britain also. In this article Adam Booth looks at the situation in Greece and Europe as a whole and shows how Britain cannot escape the inevitable.
On the 26th March 2011, the largest labour movement demonstration in British history was seen, as half-a-million people protested in London at the TUC’s “March for the Alternative”. For the TUC and groups such as UKUncut, the alternative is simple: don’t reduce the deficit through cuts to public spending; just clamp down on tax avoidance, tax the rich, maintain public spending, and reduce the deficit through economic growth. But with Greece on the verge of default and the risk of “contagion” growing, it seems that the only dish on the menu across Europe and in Britain is austerity.
The argument given by the TUC, UKUncut, and other well intentioned members of the left is that Greece is a different kettle of fish entirely; that Britain is in a much healthier state, and will never find itself in the same situation as the PIGS (Portugal, Ireland, Greece, and Spain) of the Eurozone. For such people, the debt crisis is a myth and the cuts in Britain are just part of a Tory ideology. As the Marxists have argued previously (see: Britain: Fighting the Cuts), the cuts in Britain are not merely “ideological”, but are the result of a very real crisis – a crisis of capitalism.
Governments regularly run a deficit in their budgets, i.e. they spend more than they raise through taxes, etc. In order to finance this deficit, governments borrow money by selling sovereign (i.e. national or public) debt in the form of government bonds. These bonds are bought up by a variety of investors, such as banks, insurance companies, and hedge funds, and the debt is paid off over time with interest. This interest rate is known as the “yield”, and is an indication of the credit worthiness or risk of default for a nation. The greater the risk of default, the higher the yield, and therefore the greater the burden of the debt.
The overall debt burden of a country can be reduced in four ways: through growth, by increasing the overall size of the economy and therefore reducing the relative size of the debt; through inflation, by reducing the real value of the debt; through austerity, by turning a budget deficit into a surplus; or through default, by simply refusing to pay back the creditors.
A problem arises, however, when governments are not able to raise the money to pay back the interest. In such cases, governments must either find additional money to pay off the debt – by raising taxes and cutting public spending – or they must take out further loans to finance the existing ones. At the same time, however, creditors may become scared of lending any more money, thus increasing the yield on government bonds and effectively closing off access to credit from the market for a government. The ability of a government to pay off the national debt, therefore, is not only dependent on the overall size of the debt, but also on the prospect for economic growth.
Greece is currently trapped in a vicious cycle of debt: the PASOK government has been carrying out round after round of austerity measures in order to cut public spending so that the debt repayments can be met, but they cannot cut fast enough, the economy is not growing, and default is on the cards. All of this is being done under the orders of the European authorities and the IMF in order to ensure that the workers and youth in Greece are left to foot the bill, and not the holders of Greek debt – primarily German and French banks. As Marx stated in Capital, “The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.” (Capital, Volume One, Chapter 31)
The first three methods of reducing the debt are off the cards for Greece: the economy is shrinking, not growing, and an increase in exports through currency devaluation is not possible due to the country’s membership of the Euro; devaluation, and therefore inflation, would only increase the yield on the debt and is also limited by membership of the Euro; austerity has been tried already, and is only resulting in exacerbating the situation by plunging the country further into recession. Default, in one shape or form, is quickly becoming the only option.
The financial markets are giving clear signals that they expect a default on sovereign debt in Greece, and are now effectively refusing to lend any more money. Rating agency Moody’s recently cut the Greek credit rating from B1 to Caa1, indicating a 50% risk of default. According to The Economist (26th May 2011), “On May 20th Fitch, a ratings agency, cut the country’s debt rating by another three notches. Yields on Greek ten-year bonds this week reached 16.8%, more than twice what they were a year ago.” Meanwhile the Wall Street Journal (31st May 2011) reported that, “Greek two-year debt traded Monday at a yield of nearly 25%, about 23 percentage points more than comparable two-year German bonds and roughly double the level of two months ago”. The possibility of a Greek default has become less a question of “if” and more a question of “when”.
Many serious bourgeois commentators are proposing a “soft restructuring” or “reprofiling” of Greek debt – allowing creditors to “volunteer” to extend the payback period of the debt, thus buying Greece more time. Other commentators are even suggesting a “hard restructuring” of debt, forcing a serious haircut on the value of debt, thus ensuring that creditors only lose a small proportion of their money, as opposed to losing a much greater amount through default. Unfortunately, however, the creditors are not too willing to “volunteer” for a hard restructuring of debt.
The European Central Bank (ECB) was adamantly against any soft restructuring until recently, but is warming to the idea in the face of few other available options. The IMF has agreed to hand out a further instalment of bail-out funding, but are insisting that the PASOK government carry on with its “deficit reduction strategy” (i.e. austerity programme), which includes increased taxes and the mass privatisation of over €50bn worth of public assets. Needless to say, these measures have not gone down well in Greece, and demonstrations against the government and their austerity measures have been increasing in terms of both quantity and quality (see: Greece on the brink of revolutionary situation).
The fear of European bourgeois politicians is that any default or restructuring of Greek debt would lead to contagion. In other words, banks and other financial institutions across Europe that own Greek debt would be forced to cover the costs of a Greek default (which would most likely be passed onto European taxpayers), and the cost of borrowing would increase for other precarious economies, such as Ireland and Portugal, making default a more likely possibility for these countries also. The Wall Street Journal (31st May 2011) reports that:
“Both Ireland and Portugal are rated one level above "junk" status by Moody's Investors Service.
“Last week, Moody's warned about the potential for a Greek default to hurt the ratings of other countries.
"‘The full impact [of a Greek default] on Europe's capital markets would be hard to predict and harder still to control,’ Moody's analysts wrote. ‘The fallout would have implications for the creditworthiness and hence the ratings of issuers across Europe.
“Should those ratings get cut further, that could force selling by money managers whose guidelines prohibit holding junk-rated debt and result in those countries being deleted from investment-grade bond indexes tracked by many managers.”
Ireland and Portugal, therefore, are likely to follow suit behind Greece. Both economies are struggling with low or negative economic growth (Portugal had an annual GDP increase of 1.3% in 2010, whilst Ireland had a decrease of 0.1%), and both countries are tied into the Euro, thus limiting their room for manoeuvre in terms of monetary policy. If further borrowing from the credit market was blocked, both countries would face the prospect of default also. This would have a massive impact on the rest of Europe, as shown by the figure below, which highlights the exposure of other countries to Greek, Irish, and Portuguese debt.
Of particular concern to the UK is the Irish economy, with approximately $200bn of exposure to Irish government debt for British banks and financial institutions. This vast amount includes not only government debt owned by British financial institutions, but also credit derivatives, i.e. insurance against default. Britain’s dangerous level of exposure to debt was already revealed in part by the financial collapse of Icelandic and Irish banks over the past few years – a number of local councils and pension funds in Britain lost millions that had been invested in Icelandic banks, and the British government stepped in to provide £7bn of support for the EU bail-out of the Irish banking sector in late 2010.
It can be seen, therefore, that the events in Greece are not isolated from the rest of Europe and Britain. Indeed, financial institutions in the US are also heavily exposed to debts in the PIGS countries, hence the interest of the US administration in the Eurozone’s economic troubles. Although the UK is not in the Eurozone, it is still highly integrated with the European financial system, and is exposed to vast amounts of European debt.
Despite all of this, some argue that Britain is different from the PIGS countries; that the cuts in Britain are not necessary, but are the result of the “nasty” Tories and their ideological, passionate hatred for the public sector. Whilst it is true that the Tories may have a particular penchant for privatisation, it should be noted that it is so-called “Socialist” governments in Greece (PASOK), Portugal (which was governed by the Socialist Party until recently), and Spain (PSOE) that have been carrying out austerity measures in Europe, including a brutal assault upon the public sector and large scale privatisation. In these countries, it is not the ideology of the government that dictates the speed and depth of the cuts, but the interests of the financiers, bankers, and speculators that are represented through the European Central Bank and the IMF.
The argument is also put forward that the debt crisis in Britain is simply a myth; a political lie used by the Tories to justify public spending cuts and privatisation. Groups such as False Economy inform us about how the national debt is historically very low, pointing out that the UK public debt was almost 250% of GDP after WWII, and yet the country managed to create the pillars of modern society, such as the NHS, council housing, and the welfare state.
As has already been explained, the ability of a government to pay off the national debt is dependent not only on the overall size of the debt, but also on the prospects for economic growth. At 80% of GDP, the public debt in the UK is greater than that of Spain (60%), a country that is suspected to be the next in line for a bail-out, and not far behind that of Portugal (93%) and Ireland (96%). In addition, Britain’s budget deficit, at 10.4%, is the same as Greece’s and is larger than the deficits of Portugal (9.1%) and Spain (9.2%).
The enormous debts held by the UK after the Second World War were eroded away partly by inflation, but mainly by the largest economic boom in the history of capitalism. Such a prospect for economic growth is not on the cards for Britain at the current time; a decline of GDP by 0.5% in the last few months of 2010 was followed by extremely weak growth of 0.5% in the first quarter of 2011. As has been pointed out elsewhere, this is the worst “recovery” from a recession for the British economy since 1830.
It is true that the financial markets still consider Britain to be a stable economy, as reflected by the top credit rating of AAA given by the big three western rating agencies. In part this is due to the enthusiastic pace of austerity being displayed by George Osborne and co., which received praise recently from the CBI (Confederation of British Industry) and the IMF – i.e. from the voices of big business and finance capital. It is interesting to note, however, that the UK’s credit rating was recently downgraded (along with the US) by Dagong, a Chinese rating agency, due to “low growth and high inflation”. In a statement released by the rating agency, Dagong said that, “The downgrade reflects the true status of the deteriorating debt repayment capability of the UK and the difficulty in improving its sovereign credit level in a moderately long term in the future.”
Whilst Britain’s debt crisis may not be immediate – yields on UK government bonds are currently low and the dates of debt repayment (i.e. the debt maturity) are further in the future – it is very much real. Debt repayment, at £42bn per year, is currently the fourth largest area of public spending, and with the prospect of stagflation (economic stagnation and high inflation), it is possible that interest rates will be increased, with the nasty side-effect of higher borrowing costs. In turn, the likely default of Greece – also likely to be followed by Ireland and Portugal – will increase borrowing costs further and leave the UK with an even greater amount of debt.
The entire global economic system is in crisis, and every path to recovery on the basis of capitalism is blocked. Keynesian economic stimulus, proposed by some, does nothing but increase the national debt even further and drive up inflation, which in turn erodes the real value of wages and savings (see: Inflation: Hitting the Poorest Hardest). All the usual mechanisms for getting out of a crisis, such as low interest rates, have already been used up during the period of boom that preceded The Great Recession. The US economy, the motor force of the global economy, is in crisis also, and is running a deficit of $1.4 trillion (£858bn) – over 10% of GDP – and is only kept going by the fact that the dollar is the world’s reserve currency.
The bourgeoisie in country after country have been left with no other option than to attack the working class through mass austerity. But whilst workers and youth feel the pain, profits for big business are up. According to the Buttonwood blog by The Economist:
“Since 1990, real domestic corporate profits in America have risen 200%, while real compensation for corporate employees has increased just 20% and real median family incomes are up just 2% (is this the American dream?). Since 2000, the relevant statistics are 80%, 8% and minus 5% respectively.”
“Profit margins in the non-financial sector as measured by EBITD (earnings before interest, tax and depreciation) are as high as they have been at any moment in the last 50 years.” (Buttonwood’s notebook, The Economist, 25th May 2011)
Remarkably, The Economist later hits upon and explains the real cause of the crisis:
“So why haven't workers got more of the pie? The conventional economic assumption is that compensation should keep pace with productivity. But the productivity gains have accrued to employers not employees...
“...For the lowest-paid workers, things have been getting worse not better as they spend more of their incomes on food and energy, where inflation over the last year has been particularly strong. The divergent trend between profits and incomes brings us to the Marxist question of whether demand eventually collapses because workers cannot afford to buy the goods that capitalists produce. This crisis was averted in the 1990s and 2000s because consumers borrowed money to maintain spending - an option that is no longer very popular. So if the economy is to prosper in the next few years, it seems likely that the workers will have to get a better deal – and profit margins will have to take a hit.”
Even The Economist, the mouthpiece of the bourgeoisie, is paying lip service to Marx and his analysis of capitalist crisis! As is explained by The Economist (or rather by Marx), the current crisis is a crisis of overproduction, whereby, due to the private ownership of the means of production, there is not enough effective demand (i.e. a market) to be able to sell the mass of commodities produced in order to realise profits. In other words, because profit is extracted from the working class by the capitalist class in the form of unpaid labour, workers are not able to buy back the very goods that they produce.
In the past period capitalism has overcome this fundamental contradiction through the expansion of credit – i.e. through an artificial expansion of the market – with cheap mortgages, loans, and credit cards. This all came to a halt with the onset of the current crisis. As The Economist mentions, this option is “no longer very popular”, and banks are unwilling to lend so easily these days.
The Economist also hints at a way out of the crisis by saying that “profit margins will have to take a hit”. In other words, the capitalist class must also pay their share for this crisis. But as has already been explained, it is not possible to make the rich pay simply through taxation. Any attempts to “tax the rich” and plug the tax gap, whilst laudable, will merely result in a strike of capital by the money owners and a reduction in investment. The only force capable of making the rich pay their fair share is the force of the labour movement, backed up by a workers’ government with a socialist programme to nationalise the banks.
There is no way out for the global economic system under capitalism. What is needed is a radical transformation of society to place the financial institutions, infrastructure, and industry under the public ownership of the workers, the trade unions, and elected representatives to run production – and society – in the interest of ordinary people and not for profit.
The events in Greece hold up a mirror to our future in Britain; not only in terms of the disasters that await for the economy due to this crisis of capitalism, but also in terms of the hope and inspiration for workers and youth in Britain that can be gained from the magnificent mass movement taking place in Greece at the current time. Solidarity to our brothers and sisters in Greece! May their movement be the first step in the European revolution and the establishment of the Socialist United States of Europe!