European crisis deepens

All the talk about the European crisis finally “turning the corner” has gone up in smoke as crisis ruturns big time to Europe. In the aftermath of the collapse of the Dutch government over its austerity budget and the uncertainly surrounding the French Presidential elections, the political battle over austerity has moved from Europe’s peripheral south to the heart of the eurozone itself.

The Netherlands, which was the model of stability and economic orthodoxy, has been cast into turmoil. It is a further sign of the gathering revolt against austerity. The dilemma for politicians, as in the French Revolution, is who should pay.

The EU Commission, in an attempt to put a so-called firewall in place against the fears of contagion, has demanded that governments bring their 2013 budget deficits below 3% of GDP. This will produce an almighty squeeze on spending. The Netherlands, until recently a hard-core ally of Germany, has been thrown into political crisis.

Last year’s government deficit of 4.7% of national output was seen as an embarrassment for a government acting as a cheerleader for European austerity. Markets have reacted and there is a hint that the Netherlands’ triple A rated status is now under threat.

Recession

The demands for universal austerity by the bankers and capitalists are dragging one country after another into deeper recession. Some are facing considerable falls in their GDP.

A recent report from the IMF’s Global Financial Stability Report talks about the progress towards, what it calls, a “quest for lasting stability’! Even the Financial Times had to laugh. “Many would settle for something far less ambitious: a few years of stability would be an unexpected delight.” (FT, 25/4/12)

But even this is off the agenda. This deep crisis of capitalism, with all its accompanying problems, is a recipe for acute instability. Everywhere, capitalism is facing massive de-leveraging, in other words, paying off its debts.

The capital base of the 58 top European banks could shrink as much as 2 trillion euros by the end of 2013. This has massive implications for the European economy and there is still a long way to go. They will need to cut demand to increase savings.

Despite their efforts, the USA has only reduced its debts by 15% of GDP; Britain by only 10%; and Spain by only 6%.

According to Jens Weidmann, the President of the German Bundesbank, “The deficit countries must adjust. They must address their structural problems. They must reduce domestic demand. They must become more competitive and they must increase their exports.”

This bankers’ programme will mean years of wage cuts and falling living standards. This will simply reduce demand and deepen the recession that is gripping Europe. The attempt to embark on massive exports would be intolerable for the rest of the capitalist world. Not everyone can export! Even the Chinese economy is slowing, which will hit Europe and America. This will inevitably lead to protectionism and beggar-thy-neighbour policies. It is the same recipe as in the Great Depression.

Europe’s economy is contracting and unemployment is rising. Spain, with close to 24% unemployment will see its economy shrink by 1.7% this year. Unemployment in Greece is officially 19% and the economy is set to shrink by 5% - the fifth consecutive year of contraction.

Storm

The Spanish government is in deep trouble, especially after King Juan Carlos, while saying he was loosing sleep over the unemployed, was caught hunting elephants in Botswana. Italy has been drawn into the storm with the costs of debt rising and doubts expressed over its austerity plans.

In Portugal, public sector workers are facing a wage cut of 30%, with wages in the private sector also falling, as taxes rise. But this will solve nothing. Europe buys 3/4 of Portugal’s exports, while Spain accounts for a quarter, but these markets are shrinking. “The treatment is so strong”, said Carlos Loureiro of Deloitte, “I fear that we may kill the patient with the cure.”

Greece, on the other hand, is facing a general election and increased political turbulence. The leader of LAOS warned that to continue the austerity will mean economic collapse and social unrest “of a kind that Europe has not seen for decades.”

It is this prospect that terrifies the ruling class. These measures are producing revolution.

A recent editorial in the Financial Times came to the conclusion that  “Universal austerity is proving self-defeating” and talked about the need for a growth agenda. But this is also laughable. There is no growth. The market and investment is shrinking. At the same time the editorial calls for “long and painful” wage cuts to bring about an “internal devaluation”.

They are caught between the devil and the deep blue sea. Under these conditions the break up of the euro is inevitable, followed by the likely break up of European Union. This, in its turn, would provoke a European banking crisis and general economic collapse.

Measures

They cannot resolve the crisis. They have already resorted to extreme measures, but to no avail. The situation simply gets worse. The reason is that the capitalist system has reached its limits. Whatever the governments and banks do will be wrong. It is a Catch 22 situation.

The only way out lies with the working class. The alternatives we face are either endless mass austerity or the overthrow of capitalism. There is no middle road.