The title of The Economist article said it all: “Europe: More pain, little gain”. All over Europe, governments are struggling to bring huge deficits under control. In order to do this, they pass the bill to the working class and the middle class. Gradually the truth is beginning to dawn on the workers. They are faced with a whole period of cuts and attacks on living standards. And they are reacting.
As always, the French workers have been in the forefront of militant action, with general strikes and militant mass demonstrations. But the movement is beginning everywhere. On Saturday 27 November, there was a demonstration of 100,000 in Dublin. The recent general strike in Portugal was massively supported (80-85 percent, according to the union leaders – the biggest since the Revolution).
In Spain there was a general strike on 26 September. In Italy there have been mass demonstrations called by the CGIL and FIOM. In Greece there have been eight or nine general strikes so far this year. In Britain there have been angry demonstrations of students in all the main cities to protest against the proposed increase in student fees.
This is only the beginning. It indicates that there is ferment at all levels of society and this must find its expression inside the ranks of the labour movement. The union leaders are desperate to reach a deal with the bourgeoisie but there is a problem: the bourgeoisie has nothing to offer. It is not just that they cannot offer any meaningful reforms. They cannot tolerate the continuation of those reforms that were conquered by the workers in the past.
Therefore the union leaders have no alternative but to mobilize. However, in the present conditions, even general strikes are not sufficient. The ruling class has no alternative but to continue with their attacks. This is not a transient state of affairs. It is a turning point in the history of Europe. And it is a finished recipe for a revival of the class struggle.
The crisis continues
The boom years were largely based on a vast expansion of credit, which was reflected in a huge increase in private-debt levels before the crisis, and unprecedented levels of public debt after it. After a drunken binge comes a severe hangover. Governments tried to get out of the slump by stimulating their economies, which only means that the rich world has lots of money to pay back. This is one of the reasons why any recovery will be delayed and there will be one crisis after another.
As markets woke up to the real state of government finances in the developed world, there was increasing nervousness about the problem of sovereign debt. And the problem is set to get a lot worse. In 2011 the amounts of government debt maturing in America and the euro area will be even bigger than those in 2010. It will amount to some $3.5 trillion, compared with $3.1 trillion, according to Bloomberg.
At the moment attention is focused on the peripheral euro-zone economies (Ireland, Portugal, and Greece). The chain of European capitalism is breaking at its weakest links. But with every new link that snaps the strength of the whole chain is tested to breaking point. Sooner or later this point will be reached.
While the European Union and IMF were in Dublin haggling over the details of a bail-out for Ireland, officials in Portugal and Spain were attempting to sooth the nerves of investors with assurances that their economies and banks did not need a similar rescue. José Sócrates, Portugal’s prime minister, hoped that the help given to Ireland would calm the markets because his country was “clearly suffering from a contagion effect”.
The trouble is that nobody believes them. Worries about sovereign debt continued and the cost of borrowing for both Portugal and Spain rose sharply. The spread on Spain’s ten-year government bonds over that on German Bunds jumped to its highest since the introduction of the euro. This resembles the charts placed at the bottom of a critically sick patient in hospital.
Ireland’s bailout is an even bigger blow to the euro than Greece because major European banks hold more of Ireland's debt. Portugal is next. From Portugal the contagion will spread to Spain. And after Spain comes Italy and Britain will not be far behind.
Where are the green shoots?
The crisis of the euro is attributed to “lack of confidence”. But this is an explanation that explains nothing. Why was there confidence before and why is there no confidence now? The answer is that the capitalists (aka the “investors” or “the market”) see no prospect of an early recovery of the world economy. Indeed, in many ways the international crisis of capitalism continues to worsen. Talk of “green shoots” is no longer heard. The mood is one of pessimism, punctuated by sudden bouts of panic.
The key piece in the world economy remains the USA. Here the signs are at best mixed. The US economy grew faster in the third quarter than previously thought: by 2.5% at an annual rate, against an initial estimate of 2%. But the news was overshadowed by the Federal Reserve’s bleak assessment that the unemployment rate would remain high for longer than it had predicted, dropping to only about 9% by the end of 2011.
The US housing market remains depressed. The number of previously owned homes sold in America was 2.2% lower in October than in September, and 25.9% lower than in October 2009. Sales of homes that are in foreclosure or other distressed financial situations accounted for 34% of the total for October, about the same proportion as in September.
Some economists are comparing this to the situation in 1929-49 or in 1965-82. The realization is gradually dawning on the bourgeoisie that there will not be any serious recovery anytime soon. They hope that emerging markets will produce big enough profits to rescue them. But finally there is no real confidence in anything.
The nervousness of the bourgeois finds its expression in the gyrations of the stock markets of the world. After the recovery in 2009, stock markets are faltering again. The bourgeoisie is suffering from a kind of collective schizophrenia. One minute they talk about deflation, the next minute they fret about the danger of inflation. The economists cannot make their mind up and are giving contradictory advice.
The Economist recently gave a pessimistic appraisal of the situation:
“If the outlook is for years of low economic growth, then this gloomy dividend assessment will probably be correct. After all, the rebound in profits in 2009-10 owed much to an improvement in margins. Companies were able to shed staff while improving productivity in the remaining labour force. But this does not seem sustainable in the long term. Either the economy will recover, and labour costs will rise, or the high level of unemployment will weigh on demand and revenues will suffer.”
Contradictions are emerging at all levels. Government bonds have traditionally acted as the safe havens of financial markets. The doubts about the creditworthiness of Greek or Portuguese bonds only mean that investors will opt for the security of German government bonds or US Treasuries. But since even these are now regarded with suspicion, the bourgeois are increasingly resorting to an even older bolt-hole: gold.
The irresistible rise of gold, which has reached an all-time high, is a graphic reflection of the fear of inflation among investors and their lack of confidence in the existing currencies. They know that in the past governments have used inflation as a way of dealing with a heavy debt burden, and they also know that such methods inevitably lead to an explosion of inflation further down the road.
Suddenly currencies dominate the headlines. If they are not worrying about the euro or the dollar, they are complaining about the Yuan. China is being constantly criticized for its undervalued currency, especially in America. Under the pressure of such criticism, and in order to avoid protectionist measures, Beijing did allow the Yuan to rise against the dollar, but the increase was so small as to be meaningless.
China’s current-account surplus rose to $102.3 billion in the third quarter, double the amount from a year earlier and about 7.2% of GDP. With Chinese exports soaring to new levels, Western governments are pressing China to do more to “address its trade imbalances”, that is, to export less and import more. But Beijing does not seem in any hurry to follow this benign advice. China is a very successful exporter, and consequently has accumulated a substantial trade surplus. In order to keep their exports attractive to American and European consumers, the Chinese make use of currency depreciation as a way of cheapening their products.
Other countries are trying to follow the same road as China, exporting their way to recovery. Put in other words, this means exporting unemployment. But there is a small problem with this: in order for somebody to export, someone else must act as a net importer, and in order for someone to devalue their currency, someone else must let their currency rise. This is a slippery path that can lead to a series of competitive devaluations as countries intervene to push down the value of their currencies to secure an advantage over their rivals. The result could be increasing protectionism as countries accuse each other of “artificially” gaining market share.
There is already talk of currency wars. This is an extremely dangerous situation. Let us recall that what transformed the 1929 Crash into the Great Depression was precisely protectionism and competitive devaluations. It is in this context of extreme global volatility that we must see the crisis of the euro.
Governments are walking a tightrope; trying to reassure the markets by carrying out brutal cuts in the name of “budget discipline”, while trying not to inflict irreparable damage on their economies. But this is like trying to square the circle. In the end, the austerity programmes in Europe will solve nothing but only make the crisis worse. It is quite possible that the recovery will be undermined by the tightening of fiscal policy, particularly in Europe.
The bail-out packages for Greece and Ireland were meant to prove to the financial markets that the euro would be safe in 2011, since a huge stand-by fund means that there is an investor of last resort in place for euro-zone debt. But this by no means guarantees the future of the euro.
On October 29th, leaders of the European Union agreed that they should re-open the treaties “to establish a permanent crisis mechanism” that would include “the role of the private sector”. The markets took this as a sign that bond-holders would be made to pay for future bailouts of troubled euro-zone members. Immediately they began to unload the debt of the most exposed countries, namely Ireland and Portugal.
On November 21st the Irish government finally yielded to pressure from the European Union to seek an emergency bail-out from the EU and the IMF in the region of €85 billion ($115 billion). When the Greek government obtained a €110 billion bail-out in May and a joint EU/IMF fund worth €750 billion was put in place to finance this, the markets rallied. But this time the big credit-rating agencies reacted negatively.
If the Irish thought they would be rewarded by investors after agreeing to the deal, they were soon disabused. Whereas after the bail-out of Greece in May, the markets calmed down for a while, there was a slump not only in Irish assets, but also in those of Portugal and Spain. When the deal was announced bond yields in Ireland initially fell to 7.93%, but later Standard & Poor’s promptly downgraded Irish government debt from AA- to A, and Moody’s promised a “multi-notch downgrade”.
Within 24 hours, the spreads of Irish, Portuguese and Spanish government debt over German bonds had grown wider than before the deal was announced. The spread on Spanish bonds reached its highest since the euro’s launch in 1999. In other words, the bail-out had failed even before the ink was dry on the paper it was written on. The reason is simply that international Moneybags do not believe that these countries will be able to repay their debts. They know that the latest deal will not eliminate Ireland’s debts, but simply refinance them.
It was similar to what happened in 2008, when the frantic efforts to revive the American banks produced only temporary rallies. After the rescue of Bear Stearns in March 2008 there was such an outcry that the American government was unwilling to save Lehman Brothers in September. Now Germany faces the same dilemma. It is Germany that holds the purse strings of the EU. It was Germany that (reluctantly) put its hands in its pockets to bail out Greece and Ireland. But this has its limits.
From Ireland to Portugal…
After Ireland the markets are now turning their attention to the Iberian countries, with Portugal next in line. On November 23rd Portugal was paying over four percentage points more than Germany to borrow money. This is similar to what Greece was paying in mid-April, just weeks before its bail-out.
Portugal is another weak European economy, suffering from slow growth and a big budget deficit. It is clear that Portugal will be forced to follow Ireland’s path. In order to please the markets the Socialist-led government of José Sócrates announced a package of cuts. As a result a general strike was called, which was widely followed. But it is not a question of if Lisbon will seek a bail-out but when.
However, all these rescue plans and bailouts solve nothing. If it were the case that Ireland, Greece and Portugal only needed to borrow a certain amount of cash to help them solve their difficulties, the EU rescue plan might work. But the markets are convinced that the problems go deeper, and that, in fact, these countries are insolvent: that is, in plain language, they cannot afford even to service their debts, let alone repay them.
The men of money suspect that the debts of Irish banks are far worse than what has been hitherto admitted and are worried by the Dublin government’s decision in September 2008 to guarantee all the liabilities of these banks. This rash decision may end up costing even more than the promised EU/IMF loans of some €85 billion, especially when bank deposits continue to flow out of the country, as they are doing.
They are therefore putting excruciating pressure on the Irish government to push through an austerity budget before a general election can be called. The situation is similar in Greece, where the government, having carried through a severe policy of cuts, now finds that it cannot raise enough in taxes or grow fast enough to finance a huge amount of borrowing.
In Ireland Brian Cowen still has to pass the 2011 budget in early December. Since he was finance minister while the Irish bubble inflated and prime minister when it burst, his credibility is now zero. After repeated denials that he was seeking a bail-out, he then signed a humiliating deal that not only commits Ireland to pay a huge bill but gives EU commissioners powers to see that it keeps its word.
This has provoked a hue and cry in Ireland about “loss of sovereignty”. The Irish Times openly wondered if the 1916 Easter rising had been in vain. They do not seem to understand that real sovereignty lies with the almighty Market, against which it is pointless to protest.
The political crisis followed swiftly. The Green Party, Cowen’s Fianna Fail’s coalition partner, declared that it would walk out in January, forcing an early election, though not before they help to pass the 2011 budget on December 7th. Thus, they will be party to the four-year plan to cut the budget deficit to 3% of GDP by 2014 to comply with the terms of the EU/IMF rescue plan. Even that may not be enough to get the budget through.
Olli Rehn, the European economic commissioner, insisted that Brussels would not interfere in Irish politics, but added that “stability is important”. The budget will be yet another dose of austerity, including for 2011 €6 billion in spending cuts, tax rises, savage welfare and public-sector pay cuts and a reduction in the minimum wage.
The deal has caused a crisis in Fianna Fail, which has a poll rating of 17%, its lowest ever. Fianna Fail, the dominant party in Ireland ever since the country’s independence in the 1920s, is heading for the greatest electoral defeat in its history. That is why some of its parliamentary group have been calling for Cowen’s resignation. Fianna Fail will probably be replaced by a Fine Gael/Labour coalition.
Thus, the economic crisis immediately becomes a national political crisis. This is what we meant when we predicted that every attempt to restore the economic equilibrium will destroy the social and political equilibrium.
And from Portugal to Spain
Spain went up like a rocket and has come down like a stick. Like Ireland, it experienced a feverish housing boom that ended in collapse. As recently as 2007 the Spanish economy had one of the highest growth rates in Europe. Those days are over. When the construction bubble collapsed it dragged the whole economy down with it. In 2009 it was the world’s ninth-biggest economy. It will soon be twelfth, behind Russia, India and Canada.
In 2010, as other European economies began to experience some kind of sluggish growth, Spain’s economy shrank. The OECD predicts that Spain’s GDP will shrink slightly this year and grow by just 0.9% next year. Like Portugal and Greece its growth is low and unemployment is over 20%. A few days ago the Bank of Spain’s governor, Miguel Fernández Ordóñez, admitted: “Contagion has spread to Greek debt, to Portuguese debt and, to a lesser degree, to our own debt as well as Italy’s and even Belgium’s.”
Although Spain’s national debt was only 53% of GDP last year - 21 points below the EU average – it is now firmly in the sights of the speculators. To begin with, Spanish banks are heavily exposed to Portugal and the debts of Spanish households and firms are far above the European average. The current-account deficit is still over 4% of GDP. The full extent of losses on property loans on the banks and the cajas de ahorro (savings banks) are unknown.
Spanish banks hold up to 200,000 newly built homes as part of €60 billion-worth of real estate taken in debt-for-asset swaps with bankrupt developers. Many of these will be dumped on the market in 2011, depressing house prices still further. The markets fear that Spain’s economy will fail to grow. In 2011, Spain’s GDP is expected to expand by less than 1%.Unemployment is over 20%, while inflation is higher than in Germany.
What happens in Spain will have a crucial effect on the future of the euro. The Economist put it bluntly in an editorial entitled: To stop the euro’s meltdown, Zapatero must revive Spanish reform. That is to say, the socialist government must bring in austerity measures to cut the budget deficit. Zapatero is being forced to do the bidding of the market. He has carried out spending cuts and tax rises in an attempt to reduce the budget deficit from 11% of GDP in 2009 to 6% next year. He has cut civil-service pay by 5% and raised VAT in the teeth of a general strike.
Thanks to a deal with the Basque Nationalist Party Zapatero’s minority government is able to push through a new austerity budget for 2011. But the markets are not satisfied. They complain that Zapatero is too soft and gives in to pressure. “Every time international markets put some pressure on our debt, the Spanish government indicates it is going to do some reform,” says Juan Rubio-Ramírez, a Spanish economist at Duke University. “And as the pressure waters down, it relaxes.”
Zapatero’s plans to raise the pension age from 65 to 67and to reform the labour market are regarded by the bourgeoisie as excessively timid. They want to abolish the system of centralized wage bargaining altogether. They complain that pension reform has been postponed until the first quarter of next year and discussions about collective-bargaining mechanism are going too slowly for the liking of the bourgeoisie. They are also demanding reform of the healthcare system. The Market is demanding that Zapatero bends to its will and sacrifices himself on its altar.
The unions replied with a general strike. Zapatero finds himself between a rock and a hard place. What he is doing satisfied nobody. It is too little for the bosses and too much for the workers. As a result, the poll ratings of the Socialists have plunged and Zapatero is heading for an electoral humiliation. He will increasingly have to depend on the Basque and Catalan bourgeois nationalist deputies, who will demand a price for their support. It seems certain the PSOE will lose the next general election in 2012, preparing the victory of the right wing Popular Party.
Germany – the key to Europe
Since governments have taken the decision to underwrite the losses of their big banks, their creditworthiness is inextricably connected to the balance sheets of the latter. The problem is that nobody knows how much the bad debts of the banks are. According to Moody’s, the credit agency, the institutions it rates globally will need to roll over $1.8 trillion of debt in 2011. To this figure we need to add the banks that are not on Moody’s list. So the total amount will be much bigger. Nobody knows how much.
This applies in particular to European banks, which will face huge refinancing in 2011. In the boom years these banks made vast amounts of money from speculation. Now they expect their losses to be made good by the central banks. The latter are seen as a kind of cornucopia – a magical horn of plenty that will supply all the liquidity needed. But the resources of central banks are not unlimited.
Germany is now expected to use up all its money and its credit to prop up the entire euro area. If it were just a question of Greece, Ireland and Portugal, they could perhaps manage. But Spain is a different matter altogether. It is the euro’s fourth-biggest economy, with a GDP and population bigger than these three countries together. The €750 billion European Financial Stability Facility was not designed to cope with Spain as well as the other three weak euro-area countries. Back in May, when it was set up, there seemed little likelihood that it would have to do so.
So far, Germany has backed the bail-outs, although constantly cursing. But will it be prepared to pay for Spain? Merkel and her finance minister, Wolfgang Schäuble, are well aware that there is increasing resentment in Germany about euro bail-outs. They also know that the 1992 Maastricht treaty contains no-bail-out provisions, a fact to which the German Constitutional Court may draw their attention at some stage. Bild asked recently: “First the Greeks, then the Irish, then…will we end up having to pay for everyone in Europe?”
Feeling the pressure, they are demanding that the EU treaties must be amended to give permanent status to the European Financial Stability Facility. Without this the rescue fund will expire in 2013. But treaty amendment is a complicated business. It took a long time to get the European Constitution approved by national referenda, and then it failed. And German insistence on this point is causing friction with other governments who are not keen on EU referenda because of the domestic political problems they cause.
Merkel has said the euro is in an “exceptionally serious” situation. Schäuble added that “our common currency is at stake.” The president of the European Council, Herman Van Rompuy, has even suggested that if the euro did not survive, neither would the EU. To placate the German electorate, and in order to combat the impression that they are too generous with German cash, they demanded that future bail-outs must include debt-restructuring provisions to impose some losses on investors. This modest proposal immediately set the investors’ nerves jangling.
The markets cannot be controlled by legislation and they are determined to show who is boss. Suddenly Germany is keeping quiet about the need to “make the speculators pay”. The European Commission was asked to draw up proposals for this mechanism, but says nothing about it. Similarly Herman Van Rompuy, the president of the European Council, who not long ago warned that the euro was in “a survival crisis”, and who is supposed to be consulting members on how to make the necessary treaty-change, has fallen silent.
Everybody is trying to pacify the markets, not antagonize them. They now swear by all the Gods that the current bond-holders will not have to pay for the bailout for Ireland. In any case they have not the slightest idea how such an “anti-speculator” rule would work. Steven Vanackere, the Belgian foreign minister, suggested that they should stop calling it the “crisis-resolution” mechanism, but rather a “stability mechanism”. But Vanackere himself is clearly not convinced that this would work: “It’s like calling the minister of war the minister of peace or the minister of defence,” he said.
Europe at a turning-point
The threat from the bond markets does not only hang over the heads of weak countries like Greece, Ireland, Portugal and Spain. It hangs over the whole of Europe and threatens to bring the euro crashing down. When the euro was launched in December 1995 we pointed out that the member states had such fundamentally different economies that they would find it impossible to march to the same fiscal and monetary policies. We explained that it is impossible to unite economies that are pulling in different directions. And we predicted that in a crisis the euro would collapse amidst mutual recriminations. This point is rapidly being reached.
For a while, it looked like the euro zone might succeed. On the basis of a general boom in world capitalism, the European capitalists were able to reach a gentlemen’s agreement. But now all has changed. The Irish bailout means that the writing is on the wall for the euro. Now the EU is desperately trying to halt the spread of the contagion, which is threatening the very existence of the euro. The Economist recently warned: “When resources become scarce, the quarrels about parcelling them out become that much more intense.” That puts it in a nutshell.
The future of the euro depends exclusively on Germany and the European Central Bank—which are effectively the same thing. Germany is the strongest economy in Europe, and it is obliged to underwrite the losses of the entire euro zone. However, this burden is likely to be more than it can bear. The euro is therefore set to fall, and nobody knows how far. Some estimate the euro could fall 15% or more against the dollar over the next six to 12 months, but nobody knows.
There are now real fears that the euro crisis will spread deeper into the European Union. Europe faces a prolonged period of uncertainty, crises, speculation and austerity. Countries like Ireland, Portugal, Spain and Greece will be under pressure to further intensify the attacks on living standards.
Although Britain is not part of the euro zone, it cannot stay out of the general European crisis. It was forced to participate in the Irish bailout, not out of altruism but because of the exposure of British banks and other interests to the Irish economy. As the dominoes fall, Britain’s turn will come. And although nobody likes to mention it, the health of the American finances is no better than those of Europe.
The reformists believe it is possible to go back to a period when the economic boom that followed World War II allowed the bourgeoisie in Europe and the US to make big concessions to the working class to take the steam out of the class struggle. But this is now impossible. All the normal mechanisms for getting out of a slump have been already used up during the boom. Interest rates are close to zero, and cannot be reduced any further. Massive deficits rule out the possibility of large scale public works.
The so-called quantitative easing is a desperate measure that threatens an explosion of inflation in the next period. On the other hand, the attempts to bring down the deficit by cutting public spending will reduce demand and can precipitate a new recession. In other words: “All roads lead to Ruin”.
Thus, the collapse of the euro can trigger off a general financial crisis that can put an abrupt end to the present weak “recovery”, precipitating a new and even steeper recession on a world scale. This is one possibility. But even in the best case scenario, Europe will be faced with a prolonged period of stagnation, like Japan over the past two decades, with low growth, high unemployment and falling living standards.
It is a commonplace that history repeats itself. The immediate cause of both the English Revolution in the seventeenth century and the French Revolution in the eighteenth century was the huge deficits of public spending. In both cases the bottom line was the same: who will pay? Everywhere the ruling class wants to put the full weight of its bankruptcy on the backs of the working class, middle class and the poor and vulnerable sectors of society: the unemployed, the sick, the old and the disabled.
The general strikes and demonstrations in France, Greece, Spain and other countries are the first indications of a revival of the European labour movement. This is only the beginning of the beginning of a great historic drama. The strikes and demonstrations are important because they bring the masses into action and allow them to feel their power. But in and of themselves they will solve nothing. The capitalists are attacking the workers not from choice, or because they are wicked people, but because they have no alternative. The smiling mask of "capitalism with a human face" has slipped, to reveal the real face of the bourgeoisie.
Everywhere there is a growing questioning of capitalism and a growing interest in the ideas of socialism and Marxism. Yesterday in the course of a student demonstration in the centre of London the word Revolution was painted on Nelson’s column. It is only a word, but it shows how the situation is developing.
We are in an entirely new period that will be more similar to the 1970s or the period between the world wars than the last three decades. The only thing that is propping up the decrepit and diseased capitalist system is the temporary inertia of the masses. Great events will be necessary to shake this inertia. But great events are on the order of the day.
London, 2nd December 2010