Crisis of the euro – shades of the Titanic

The euro zone is heading into stormy waters. The crisis that opened with the near collapse of the world banking system in 2008 has now deepened into a crisis of insolvency of entire nations. The bourgeois has no idea of how to get out of the crisis, which is sweeping like an uncontrollable tsunami from one country to another in Europe. In the words of Italy’s finance minister, “There should be no illusions about who will be saved. Like on the Titanic, the first class passengers won’t be able to save themselves.”

First Greece, then Ireland and Portugal, and now Spain and Italy, one economy after another is being dragged into an abyss. The fate of the European common currency itself is being openly called into question. The euro is being dragged under by the weight of huge national debts and the effects of the global capitalist crisis.

One year ago, when the Greek crisis was in full swing, the bourgeois consoled themselves with the idea that only the states on the edges of Europe were in trouble. But over the past few days, the idea of what the markets regard as the risky periphery has got bigger and keeps expanding from one day to the next. On Tuesday 12 July the Guardian published an editorial with the following title: Italy and the eurozone: Welcome to the inferno.

European stock markets experienced new and ever steeper falls, as fears spread that Italy would be the latest victim of the escalating European debt crisis, while Greece moved ever closer to a default. Bank shares slumped across Europe, as rumours spread that Italy would soon be unable to borrow on the international money markets. The euro continued to fall against other currencies, and is now worth only $1.388.

In the bond markets, the yield (interest rate) on Italian 10-year bonds approached 6%, the highest in at least a decade. Spanish yields rose still further, to 6.2%. Economists have warned that these borrowing costs are approaching unsustainable levels. None of these things were supposed to happen. The terms of the Maastricht Treaty prohibits big deficits and budget deficits. But Maastricht is now only a dim memory.

Theoretically, since all are members of the same single currency, with the same central bank setting a single benchmark interest rate, each country should be able to borrow at near enough the same rates. But over the past couple of years the markets have begun to distinguish between the stronger euro zone economies – Germany and its satellites (Austria, the Netherlands and a few others) and the weaker economies like Greece, Ireland, Spain and Italy.

Increasingly, the latter are being charged punitive rates for money borrowed from the money markets. The increased charges make the burden of debt heavier and even harder to repay. So when a credit agency like Moody’s lowers the credit status of a country, this action becomes a self-fulfilling prophesy.

This poses a threat to the very existence of the euro zone. The European Central Bank might be able to keep Greece afloat (although experience shows that this is not so easy). It managed to stage a bailout for Ireland and Portugal, which has solved nothing. But there is simply not enough money in the ECB to bail out countries the size of Spain or Italy. Any attempt to do so would soon exhaust the bank’s funds.

Failure of bailout

The rescue package of close to a trillion euros that was hastily cobbled together by European finance ministers last year has solved nothing. A Greek default has only been postponed but very soon it will become inevitable. All the attempts to prevent it will fail. The same European finance ministers struggled to get an agreement on a second aid package for Greece. Although in the end the latest round of austerity measures were pushed through the Greek parliament, the markets have become increasingly nervous as they can see that even these measures cannot stop the inevitable.

The reason for this nervousness is clear. The first Greek bailout of €110bn, did not work, but very soon Greece was seeking a further €100 billion and more just to remain solvent through 2014. But the question is: who is to pay for all this? The EU leaders are split over the issue: should Greece be eventually allowed to do a soft, controlled, partial default on its debts which would force banks and pension funds to lose some of the money they lent to Greece?

The reason for this conflict is not difficult to see. The EU and the IMF have hundreds of billions of euros in play in Greece. Therefore, the central bankers want to put the entire bailout burden on taxpayers’ shoulders and want the aid packages to be funded from the EU's rescue fund. The leaders of Europe cannot agree. Each national bourgeoisie wants to defend its own national interests – that is, the interests of its own bankers and capitalists.

The Germans insist that private investors must be involved in future additional aid packages for Greece, but the European Central Bank begs to differ. Why? The Economist explains:

“The ECB wants to prevent a Greek default at all costs, and is categorically opposed to involving private creditors. The ECB itself is sitting on a mountain of Greek debt and fears a chain reaction if the country is categorized as being in default.” (my emphasis, AW)

This is an insoluble problem. The Economist writes:

“The finance ministers want to square the circle. They want the private sector contribution to be ‘voluntary’ but ‘substantial’ at the same time. In addition, this debt rescheduling must not lead to the rating agencies declaring that Greece has defaulted.”

But Standard & Poor's indicated it would view such a move as a partial Greek default any way.

Rebellion in Greece

However, they are all agreed on one thing: Greece must be made to pay. That is to say, the Greek working class and middle class must be made to pay. To justify the new bailout, both under its own rules and because voters in Finland, Netherlands and Germany resent the bailout, the EU has insisted on a new range of austerity measures, amounting to a 10% cut in public spending, a 1/3 cut in the public wage bill and 50bn euros worth of privatizations.

But there is a small problem. The Greek working people rose up in revolt against these impositions. The streets of Athens and other Greek cities were filled for weeks with angry demonstrations. Papandreou this time eventually managed to get his austerity programme through parliament. His majority, however, was reduced and his government is now hated by the masses.

In the middle of the crisis he offered a national unity government to New Democracy, the centre right, who refused; he offered to stand down on condition a new government signed up to the austerity plan. But the New Democracy preferred to leave the dirty work to the PASOK for now. It is desperately trying to hold on to electoral support by demagogic opposition to the austerity measures, when it is abundantly clear that once they return to government they will proceed with the selfsame policies.

The fact is that the markets have long ago discounted a hard default in Greece: 50 to 70% of the money is, as far as they are concerned, as good as gone. This time round Papandreou, by imposing iron discipline on his MPs, managed to squeeze through austerity once again, but as even the recent package is not enough, and he will have to keep coming back with more. And there is a limit to how far he can go. The masses have moved in a decisive manner, they have had a taste of their own power and strength, and they will move again. At some stage the PASOK government will be forced out.

The law of the jungle

The politicians do not know who to blame. Some point an accusing finger at the three big rating agencies (Moody's, Fitch and Standard & Poor’s), which have colossal power in evaluating sovereign debt. It is the power of the market made manifest. German Finance Minister Wolfgang Schäuble complained that “last week there was a notification from a rating agency related to Portugal that was generally met with total incomprehension.”

“Europe can’t allow three private US enterprises to destroy the euro,” European Justice Commissioner Viviane Reding told the German daily Die Welt, in a reference to the so-called Big Three (though Fitch is majority owned by a French company and is based in both New York and London).

This is like blaming a thermometer for registering a fever. If you accept the market economy, you must accept the laws of the market, which are very similar to the laws of the jungle. To accept capitalism and then complain about its consequences is a futile exercise. A vast amount of money is constantly moving around the world, like a pack of hungry wolves following a pack of reindeer, seeking out the weakest and sickest animals. And now there are plenty of sick animals to choose from.

Moody’s decision to downgrade Portugal’s debt to junk status threw petrol onto a smouldering fire. This decision took European politicians by surprise. They were indignant at this action, which depressed share prices of major European banks and also drove down the value of the euro against the dollar. Shares in Portuguese banks, in particular, took a hit, with stock prices at Banco BPI, Millennium BCP and Banco Espirito Santo falling by as much as 5 to 7 percent.

“That is a harsh reminder that the problems are still there,” one trader told a news agency. “Now Portugal threatens to be the next stone to turn. The people are nervous.”

Prime Minister Coelho has only just taken office, but has showed himself to be slavishly willing to implement the austerity measures imposed on the country as a condition for the €78 billion bailout. The Frankfurter Allgemeine Zeitung writes:

“No one in Lisbon had anticipated this stab in the back. The announcement that Coelho's new conservative government was being sold down the river politically by Moody’s only two weeks after taking office, was sinister news. In their ambitions to distance themselves from Greece in a positive way, had the Portuguese not done everything correctly? Their savings and reform programs were custom tailored to the demands of the troika (the European Union, International Monetary Fund and the European Central Bank)… And to quiet both the EU and the IMF, Coelho sought out Vitor Gaspar, a man with a reputation when it comes to stability-related policies that is practically German.”

The downgrade is again a self-fulfilling prophecy. Moody’s are saying in so many words that Portugal will not be able to regain investors’ confidence within two years. But this downgrade has made Portugal’s fight to regain investor trust impossible. Stock prices fell and interest rates rose immediately after the announcement. The shock and anger is considerable. A former government minister even spoke of “terrorism.” The effects were felt not only in Lisbon, but also in Madrid and Rome.

Just one week after downgrading Portuguese debt to junk status, the rating agency Moody’s slashed Ireland’s credit rating to junk status also. Ireland, unlike Greece, has met the targets set for it when it received its €85 billion ($119 billion) bailout from the European Union and the International Monetary Fund (IMF) last November. But the money markets are unimpressed. They are well aware that Ireland is still struggling under an immense load of debt and they have concluded that a new bailout package is unavoidable.

Moody’s outlook for Ireland remains negative, meaning that further downgrades are likely. Finance Minister Michael Noonan on Tuesday admitted on television that the country’s situation remained tenuous. “Ireland,” he said on state television, “is a cork bobbing on a very turbulent ocean at present.”

What does this mean for the people of Ireland? It means that all the sacrifices have been in vain. The workers and farmers of Ireland are being asked to make ever bigger sacrifices to pay the moneylenders. But, as in Greece, the continuing attacks on living standards only serve to undermine the economy. The growth of the Irish economy has remained sluggish, reflected in falling tax revenues. Ireland is even less able to pay its debts than previously.

For every step back the people take, the bankers and capitalists will demand ten more. Society is entering into a never-ending downward spiral.

Germany and the euro

The ambitions of the German ruling class to dominate Europe following unification two decades ago have blown up in its face. The realization is gradually dawning in Berlin that the rapid spread of the economic crisis threatens to drag Germany down. They failed to solve the Greek crisis by a huge injection of cash. And there is not enough money in the Bundesbank to underwrite the debts of Spain and Italy.

Market fears are reflected in a sharp fall in the euro’s value against the dollar. The European common currency is now at its lowest level against the dollar in four months. The euro fell below $1.39 on Tuesday, down from €1.42 at the end of last week, and further falls are inevitable. The yield on the Italian 10-year bond rose to 5.9 percent, while the yield on 10-year bonds issued by Spain, the euro zone’s fourth-largest economy, rose to 6.28 percent.

All this is causing growing alarm in Germany, the EU’s principal banker. Die Tageszeitung writes:

“The next approaching crisis – in Italy this time – shows that the euro states’ rescue strategy isn’t working. In fact, it shows that one can’t even call it a strategy, strictly speaking. Buying time, whatever the cost – not much more than that has happened in the one-and-a-half years since the Greek crisis erupted.”

“The problem is that buying time makes no sense. It entails the constant cobbling together of new bailout packages while the speculators and their henchmen, the rating agencies, set their sights on the next crisis candidate.”

“Even though the Italian economy is fairly solid by comparison with the other crisis countries, the nation is an easy target. All market players know that the Italian debt mountain was the highest in Europe until the Greek crisis and that the Berlusconi government was usually too busy with other matters to worry about the dreary task of balancing the budget.”

This is causing Angela Merkel a gigantic headache. Splits are opening in her governing coalition. The anti-euro camp in the German parliament is growing. The polls show that up to 60 percent of Germans reject plans for a second bailout for Greece. If this trend continues, Merkel will find herself lacking the majority she needs. Under pressure from domestic opinion, suddenly Merkel and Finance Minister Wolfgang Schäuble are expressing support for debt rescheduling.

Der Spiegel writes:

“Italy has slid into the speculators’ crosshairs amid concerns that the euro-zone crisis could hit the country next. In many respects, Italy is much better off than its neighbors on the periphery. But unlike Greece, it is definitely too big to fail.”

However, Der Spiegel forgot to add – and definitely too big to save. Over the weekend, the German newspaper Die Welt quoted an unnamed European Central Bank source as saying the European Financial Stability Facility, the euro zone’s sovereign bailout fund, which has a nominal size of €440 billion ($616 billion) euros, was not large enough to protect Italy.

After Italy comes Belgium. The markets are particularly worried that Dexia, a Belgian bank, could be hit hard, bringing Belgian sovereign debt into the picture next. Can Germany be expected to pay for all this? The question answers itself.

The German mass circulation paper Bild writes:

“Italy's weaknesses have become a focus for all the doubts that in truth are directed at the euro overall: Will the euro states get to grips with the debt and currency crisis? Or won't they?

“The euro will only truly be saved if a convincing solution is found for Greece. That is lacking at present. Who still believes that constantly lending billions upon billions can do any more than postpone Greece's insolvency and debt restructuring?

“As long as the euro states just play for time and keep on shouldering new aid packages, the mistrust of the markets will remain – and will in the end possibly focus on Germany.”

The German political elite have concluded that a Greek default – chaotically or otherwise – is inevitable. They want to use taxpayers’ money to bail out the affected north-European banks. Let wages be slashed, let hospitals be closed, let the sick die, but the banks must be saved at all costs!

Italy and the euro

As we have seen, after dragging down Greece, Ireland, Portugal and Spain, the wolves are now turning their attention to Italy, which has an enormous mountain of debt, amounting to around 120 percent of the country’s gross domestic product. This is the second highest level in the EU after Greece. Moreover, Italy has €335bn of loans maturing over the next year, much more than Greece, Ireland and Portugal put together. It will need to borrow hundreds of billions and each time it asks for a loan, investors around the world are likely to worry whether it will be repaid, given its huge public debt.

Since the global economic and financial crisis, the country has only been able to manage growth of a single percentage point annually. Economic growth in the first quarter of this year was just 0.1 percent, well below the euro-zone average of 0.8 percent, and the prospects of a recovery are not promising. Just how it plans to pay off its debts remains a mystery. Investors are suddenly asking how the government in Rome plans to ever pay off this debt.

The government's borrowing costs increase day by day, threatening to strangle the Italian economy in the long run. So far, Italy has not had problems issuing new debt, but worries are growing about the rising cost of financing existing debt. The interest rate on 10-year bonds rose to 5.5 percent on Monday. The experience of other euro-zone members shows that the critical level is around 7 percent. If yields rise above that level, then markets develop their own momentum which is hard to stop.

This is no surprise to the Marxists. We predicted it even when the single currency was introduced. We said then that Italy, with its huge mountain of debt, would be one of the euro zone’s weak points. Now the warning signs are flashing. In May, Standard & Poor’s changed the outlook for Italy to negative, on the grounds that the government was not sticking closely enough to its austerity goals. In June, Moody’s followed, announcing it wanted to review Italy’s AA2 rating, on the grounds of the country’s weak economic growth, low productivity and “rigid labour market”.

The risk premium on Italian government bonds reached a new high on Monday, stocks fell and the Milan stock exchange restricted short-selling as a precaution. After having sustained losses of 3.5 percent on Friday and 4 percent on Monday, the market indices in Milan on Tuesday morning looked disastrous. Shares in the country’s biggest bank, Unicredit, lost 5.5%. Intesa Sanpaolo, Italy's second-largest bank, and Monte Paschi also dropped. Trading was suspended in some banks.

The stock market fell by up to 5 percent in the first few hours of trading. The yield spread between Italian and German debt kept widening as well. Just a few weeks ago, the rate on Italian 10-year bonds was just two percentage points higher than comparable German paper. On Monday, the difference grew to three percent and on Tuesday it reached 3.5 percent.

Doubts about the stability of the Rome government and a deep scepticism about the country’s finances form a dangerous mixture. The national debt is at 120 percent of gross domestic product (GDP), the second highest in the euro zone after Greece.

Italy is one of the seven leading industrial nations (G-7) and the euro zone’s third-largest economy. A crisis in Italy would have devastating effects on the whole of Europe. The euro slid Monday on concern about Italy, trading down 1.5 percent at $1.4050 at the start of US trading. European stock markets have also been falling. The trigger for the market uncertainty was precisely the instability of the government in Rome.

Economists have repeatedly stressed that “Italy isn't Greece or Portugal,” and “Italy's economic fundamentals aren’t that bad.” That may be true, but it will not convince the markets in their present state of nervousness. The Corriere della Sera stands strong: “It doesn’t help to get excited about international speculators. If we conduct ourselves seriously then we have nothing to fear. Unfortunately we have not been serious up until now. For that, the markets are paying.”

The question is: exactly how are Italians supposed to demonstrate their “seriousness” to the markets? The answer is provided by Greece: only through massive cuts in living standards.

Downward spiral

In reality, Italy is teetering on the brink of a downward spiral of downgrades and rising bond yields. The consequences would be disastrous, not just for Italy but for the euro zone. A new banking crisis would hit the EU. German banks hold €17 billion in Greek debt, but have €116 billion in exposure to Italian debt. The economic destiny of Germany is now indissolubly linked to a Europe that resembles a hospital ward for the terminally sick.

German Chancellor Angela Merkel on Monday responded to mounting concerns over Italy by urging the country to pass its planned budget cuts to help restore confidence. Merkel said “Germany and all euro partners are steadfastly determined to defend the stability of the euro.”

“I have full confidence that the Italian government will pass exactly this kind of budget, I discussed this yesterday with the Italian premier,” said Merkel.

In an attempt to calm the bond and equity markets, Italy’s finance minister, Giulio Tremonti, promised to “send the markets a strong signal”. This “signal” consisted of an unprecedented package of austerity measures: a four-year, €40bn programme of cuts. This is a desperate attempt to balance the budget by 2014 and begin reducing the level of debt.

The international bourgeoisie is increasingly alarmed at the Italian situation. The International Monetary Fund (IMF) has asked Italy to ensure “decisive implementation” of spending cuts to reduce the country’s debt. Angela Merkel told a press conference in Berlin that Italy had to agree “on a budget that meets the need for frugality and consolidation”, adding, “I have full confidence the Italian government will pass exactly this kind of budget.”

But Tremonti's signal did nothing to halt the panic. The yield on 10-year Italian government bonds soared to its highest level since May 2001. This signifies a sharp increase in the state’s borrowing costs. The panic spread to the stock market where Italian banks, leading holders of their country's debt, suffered sharp falls.

International finance capital remains sceptical about the ability of the present government to carry out the necessary cuts. Tremonti speaks for the Italian bourgeoisie. But Prime Minister Silvio Berlusconi is more interested in saving his own skin than saving Italian and European capitalism. Silvio is preoccupied with his scandals and legal battles.

When it came to a massive, €47 billion austerity package, Berlusconi attacked his finance minister, saying he was not a “team player.” He then referred to “Tremonti’s plan” as though he had had nothing to do with it. He publicly announced changes to the austerity package, and seemed to be planning to get rid of the finance minister. This will be even easier now, because Tremonti and one of his closest allies, Marco Milanese are under investigation for corruption. Milanese allegedly provided Tremonti with an apartment worth €8,000 per month for free.

In ancient Rome, a failed politician was expected to fall on his sword. But this is not ancient Rome. Berlusconi correctly assumes that further cuts would be unpopular. In a newspaper interview, he said “politics was about votes”. Tremonti was recently quoted as saying that if he should fall, Italy and the euro will follow. Perhaps he is overestimating his own importance. But the nervousness in the markets shows that the bourgeoisie share his opinion.

Bankruptcy of the “Left”

Ordinary Italian families are cutting back their spending. Only one in five Italian families is planning to take a vacation this year and most of them are contemplating staying away from home for not more than a week. Last year about half the population took a summer holiday.

People phoning in to a radio talk show on the state broadcaster RAI on Tuesday were alternately panicky and angry at the government for failing to come to grips with the dire economic picture being painted every day in the local media. “If we are the victims of speculators in both near and distant countries, can this be called democracy?” one woman listener asked.

The ruling class is well aware that it cannot depend on Berlusconi to defend its interests. The Berlusconi government will be the most hated government of any since 1945. The present mood of sullen acquiescence will turn into fury. The scenes we have witnessed in Greece will be replicated in Italy. The present right-wing coalition will fall and new elections will be called. The bourgeoisie has no alternative but to pass the poisoned chalice to the “Centre-Left”, whose ex-Communist leaders are eager to drink it to the dregs.

On Tuesday, Giorgio Napolitano, appealed to the opposition for “national resolve.” And he quickly got what he wanted. All three opposition parties in parliament pledged not to stand in the way of the passage of a package of austerity measures. They said they would not vote in favour, but they promised not to slow down the bill with a long list of amendments.

The leaders of the “Left” in Italy behave as their equivalents in every other country. No sooner does the ruling class lift its little finger than they fall over themselves in their haste to demonstrate to the capitalists that they are “responsible statesmen” who can be relied upon to hold high office. This shameful conduct may convince the ruling class that the “Left” can safely be entrusted with the administration of capitalism, but the working class will pay a heavy price for this “responsibility”.

It is partly for this reason that the Milan stock exchange experienced a partial recovery on Tuesday. The risk premium on Italian bonds dropped again and is now back to just three percentage points higher than the German benchmark. But this is only the calm before the storm.

Massimo D’Alema, head of the Democratic Party, said that once the austerity package is passed, Berlusconi should “go immediately” and make room for a new government aimed at improving the country’s financial health. The “Left” leaders are greedy for the fruits of office. They are in a hurry to enter the government, where they will faithfully do the bidding of the bourgeoisie.

The only slight problem is Berlusconi himself. He continues to insist that his coalition is “unified and determined.” He welcomed the conciliatory gestures from the opposition – and said nothing at all about a possible resignation. In the end, his future, like that of Italy, lies more in the hands of the financial markets than it does with the Italian parliament or electorate. And the markets are already signalling the end of the road for Berlusconi.

The budget will hit the poor hardest: increased health charges and a freeze on cost-of-living increases for higher-value state pensions. More cuts must be made by local and regional authorities, which are set to lose €10 billion in central government transfers. The budget also includes a rise in the stamp duty on government bonds that have for years formed the core of every middle class Italian’s savings, which could sharply reduce their income.

This will hurt many of Berlusconi’s voters and even more of Bossi’s [leader of the Northern league in coalition with Berlusconi], further undermining an already shaky coalition. The biggest threat to Berlusconi is a civil action brought against Fininvest, the firm at the heart of his business empire, by a company belonging to his long-standing rival, Carlo De Benedetti. Alarmed by the bad result of the ruling parties at local elections in May, the leader of the Northern League , Umberto Bossi, is demanding a U-turn: tax cuts funded by drastic cuts focused on defence spending.

The moment of truth approaches

The moment of truth is rapidly approaching. A Greek default will cause panic on a scale not seen for decades. The collapse of confidence will reach the point where one bank refuses to lend to another. This is what the Euro policy makers fear. If it is triggered, it will have a huge impact the whole world economy.

European government bonds, which were once regarded as the safest of safe havens, are now regarded with universal suspicion. The worries that Greece will not be able to repay its debts have spread rapidly to other countries showing symptoms of economic and financial sickness. Contagion is quite a good word to describe the present situation. The nervousness that grips the markets is like a highly contagious disease. It is spread by the air and once it enters the brain, it is fatal. There is no known antidote.

We pointed out even before the euro was launched that it is impossible to unify economies that are pulling in different directions. Now some bourgeois economists are warning that the pressures and tensions building up can lead to the collapse of the single currency. For the first time, the question is openly being aired of the possibility of the breakup, not just of the euro, but of the EU itself. The slump in the euro is an expression of the insoluble contradictions of the European Unity.

Jane Foley, senior currency strategist at Rabobank International, says:

“The contagion that is eating its way through the Spanish and Italian and other European bond markets has a self-prophesying element to it. The greater its foothold the more difficult it will be for affected countries to keep their debt maintenance costs and budgets in line […] Too much more delay and EMU [Economic and Monetary Union] could implode.”

If, as seems probable, Greece is forced out of the Eurozone, nothing will be solved. It will still be forced to implement a vicious austerity policy. The price of economic sovereignty will be very high: a worthless currency, soaring inflation, a collapse of investment and massive unemployment. Inside or outside the EU, there is no solution for Greece on the basis of capitalism.

The Greek working class has already shown that they totally reject any more austerity. At some stage Greece will have to default and refuse to pay its debts. This will give Ireland and Portugal ideas. Why should we accept cuts if the Greeks have rejected them? The ground would be prepared for a chain of defaults that would shake Europe to the foundations.

“Contagion” is on the order of the day, not only on the economic but also on the political plane. The working class in the past 60 years conquered through struggle what we may call the conditions for a semi-civilized existence. The existence of these social conquests has now become intolerable to the capitalist class. That is the real meaning of the attacks that have been launched everywhere. But the workers of Europe will not sit with their arms folded while the ruling class systematically destroys all the gains of the last half century. The stage is set for an explosion of the class struggle everywhere.

London, 15 July, 2011