When the economy was booming the euro was seen as a source of strength for those countries that had adopted the new currency. Now it is transforming into its opposite, as the crisis in Greece demonstrates. The Marxists warned about this long ago.
“Last year it was banks; this year it is countries. The economic crisis, which seemed to have eased off in the latter part of 2009, is once again in full swing as the threat of sovereign default looms.”
The opening words of the lead article in last week’s issue of The Economist adequately convey the growing mood of pessimism of the bourgeoisie. Only yesterday they were all talking of “green shoots” and the “end of the recession. Now Europe’s leaders are struggling to avert what The Economist describes as “the biggest financial disaster in the euro’s 11-year history”. Suddenly the eyes of the world are focused on Greece, which is faced with the possibility defaulting. It will not be the first such case in Europe. Iceland was forced into bankruptcy by the world financial crisis. This led to demonstrations on the streets and the fall of a government.
Iceland is a very small country on the fringes of Europe. But Greece is a member of the EU and part of the Euro zone. If it defaults, it will be the first EU member to do so. This is a serious cause for alarm among EU leaders. The introduction of a common currency means that they are tied together in an inflexible system. What was at first seen as a source of strength is now seen as a dangerous source of weakness. The crisis of Greek capitalism can cause a crisis of the euro and drag the rest of Europe down with it.
The Marxists predicted this
Over a decade ago, at a time when everyone was singing the praises of the euro and confidently predicting an irresistible movement in the direction of European unification, we wrote a document called A Socialist Alternative to the European Union, in which we presented the opposite view:
“The problem is that the European capitalists are attempting to move towards union at a time when the general economic conditions are pointing in the opposite direction. If they could obtain a rate of growth of 5 or 6 percent, as they did during the period of upswing, then they could bring about monetary union without too much trouble. But with growth rates of 3 - 2 percent or less, this is impossible.
“(…) All this means that a Federal European state on a capitalist basis is ruled out. Especially in conditions of world economic crisis, which is inevitable in the next two years or so, all the contradictions will come to the fore. It is unlikely that the EU will break up completely because of the need to defend their markets against the USA and Japan. They have to hang together or hang separately. But the movement towards European union will founder in a sea of national conflicts and bickering.” (A Socialist Alternative to the European Union, Alan Woods, 4 June 1997)
The failure of the attempt to introduce a European Constitution confirmed this perspective. And what did we write about the euro?
“There is a vast gulf separating theory and practice. In theory, it all looks very nice and logical. The problem is that the capitalist system is anything but logical. In the abstract, the idea of a common European currency is a good one. It would save a lot of money, streamline trade, facilitate long-term economic planning and investment decisions and eliminate a whole series of unnecessary and wasteful operations. But in practice, on a capitalist basis, it would be a disaster. In theory it would mean that all the national currencies would be locked into a rigid system. No national government would be allowed to alter the agreed exchange rate. This means that no country would be allowed to get out of a crisis by resorting to devaluation.
“(…) Denied access to devaluation, each government would have to seek a solution at home—which means a policy of savage deflation and unemployment, especially for the weaker economies. It also means an enormous increase in tensions between the different states and between the classes within each state. Such an inflexible monetary system is clearly unviable. In practice, from the beginning each national state will try to get an advantage over the others. This will create all kinds of conflicts, leading to eventual breakdown. Neither will the attempt to impose a regime of permanent austerity work.
“The central problem may be simply stated: the idea that economies of such different characters, all pulling in different directions, can be successfully harnessed to a unified central currency, backed up by common funds and binding legislation, is clearly false. The capitalist system is anarchic by its very nature. The attempt to tie these economies into a rigid common exchange rate will immediately give rise to a whole series of distortions and unbearable contradictions. When the economic conditions of one state demand an increase in interest rates, those of another will demand a reduction. Who decides? It is not difficult to foresee the answer. As the chief economic power in Europe, Germany will impose its criteria through the Bundesbank which will effectively control the central banks. We already saw this when the Bundesbank increased interest rates without bothering to consult its partners. This was the case even before EMU has been introduced. EMU would only put the official stamp on the actual relation of forces that already exists.
“In a fixed exchange system, some are bound to lose out. (…) Although they have indicated that they intend to join EMU in the first wave, Spain and Italy are too weak to do this without causing intolerable contradictions at home. Greece is automatically excluded, although the Simitis government is launching an unprecedented attack against living standards in the hope of qualifying at some date in the distant future. Likewise the Portuguese Socialists are doing the dirty work of the capitalists. This is preparing the ground for an explosion of the class struggle in all these countries in the next few years.
“(…) The introduction of EMU will not abolish the boom-slump cycle. The movement into recession will inevitably affect the finances of each country somewhat differently depending on the relative strengths and weaknesses. But it must mean a decline in income from taxes and an increase in expenditure on such things as unemployment. What action could the British government take in the above-mentioned case? Under Maastricht, it would not be allowed to borrow money to cover the deficit. The only way out would be to cut spending and raise taxes in the middle of a recession (…)?
“(…) On a capitalist basis, a stable monetary union cannot be achieved without a unified state. Moreover, the crushing domination of the world market means that, to be viable, any regional currency must fit in with the global exchange rate system. (…) Just how they propose to maintain a fixed exchange rate in a world market characterized by floating exchange rates is not at all clear. Economists in the USA are openly skeptical about the idea. Just how sound will the euro be? If international money markets are not convinced it is worth what the European bankers say, then it will be no more secure against speculative currency movements than, say, the Italian lira at the present moment.
“(…) All the burden of a recession must be borne by each member state unaided. The intention is to compel each government to maintain sound finance through the good old method of raising taxes, cutting public spending and selling off state assets.
“This stratagem leaves out of account the fact that before the first world war the trade unions and the workers' political parties were relatively weak, and the working class itself was actually a minority in most of the countries of Europe (Britain was the exception, because it had entered the phase of capitalist development far earlier than the others). Since the second world war the class balance of forces in Europe has been transformed. The social reserves of reaction, in particular the peasantry, have been whittled away by industrial development. The working class has become the dominant force in society, and will resist any attempt to take away the gains it has made since 1945.
“The attempt to go back to the classical period of capitalism will provoke an unprecedented upsurge in the class struggle. But there is no guarantee that it will bring the benefits that the capitalists anticipate. By placing a heavy burden on the shoulders of even the weakest European economies, they run the risk of provoking a collapse. The terms of the proposed monetary union assume that each country must stand on its own feet—to use the phrase beloved of all bankers.
“At present, European governments can raise money in international finance markets to cover their debts, and (with the exception of Greece) are regarded as safe bets. But Italy's ratio of public debt and unfunded pension liabilities is more than twice as large as Germany's. When Italy no longer has its own currency and central bank, such weakness will inevitably lead to an increase in the cost of credit. New York sometimes pays a higher risk premium than Italy, although its ratio of debt to income is much lower.
“Even now the major credit ratings agencies cannot agree about how to classify the future debt issued in the new currency, which suggests that there will be wide divergences in the credit ratings of the European countries after 1999. The capitalists in Italy and the other weaker economies will be forced to pay a higher rate of interest than the others, thus cutting into the rate of profit. In the longer term, this can destabilize the finances of such states, raising the danger of a crisis. For the first time, international investors are talking (in private, of course) of the risk of default in Europe.
“Just as Quebec is regarded as a high risk and has to pay very high premiums in order to borrow money, because of the danger of secession, so international finance capital is already contemplating the risk of a break-up of EMU even before it has been put in place. They calculate that the policy of permanent cuts and austerity demanded by EMU will provoke such social unrest that it will break down. Starting with countries like Italy and Finland, the weaker economies will be forced to break away. In the event of a recession, the whole thing will tend to break up.” (My emphasis, AW)
That is what we wrote in 1997. At the time when we wrote this, Greece was not yet a member of the Euro zone, and therefore we thought that the weakest links were Italy, Spain, Portugal and Finland. But the general thrust of the argument was absolutely correct, although it contrasted with the general mood of optimism about the euro and European unification that existed at that time. At the time even some of our supporters were doubtful about this perspective. Now it is a fact.
The euro has slumped 9.9 percent against the dollar since November, reflecting concern that countries including Greece will be unable to cut their budget deficits. The common currency and stocks in the region continued to fall as European leaders met to discuss plans to defend Greece. But investors were not impressed, complaining that the plan lacked details.
According to Societe Generale SA strategist Albert Edwards, the weak capitalist economies of Southern European are “trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the break-up of the euro bloc”. (February 12, Bloomberg report). The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” Now, Edwards says, even if governments
“could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable break-up of the euro zone.” (my emphasis, AW)
Danger of more defaults
Edwards was voted second-best European strategist in a 2009 Thomson Extel survey. The report also named Societe Generale as the top economics and strategy research firm for a third straight year. These views therefore must be taken as the view of the serious strategists of capital. However, it is not clear that the present crisis will lead to a swift demise of the euro. Too much is at stake for the German and French bourgeois, who will do everything they can to prop up the common currency. But if the crisis deepens, the situation will change.
This is a very serious situation for the whole of Europe. The danger is that, if Greece is allowed to default, it can cause a tidal wave of defaults, affecting not just Spain, Portugal, Italy and Ireland, but even Britain. It would lead to the immediate collapse of the already feeble economic recovery in Europe and the after-shocks would be felt all over the world. This explains the tender concern of the European leaders.
There has been talk of a German-led rescue scheme. But this has its own problems. If it materializes, other European countries may be queuing up, cap in hand, for assistance. The problem is by no means confined to Greece, as the bond markets are well aware! The international moneylenders are increasingly worried about the credit-worthiness of Spain, Ireland and Portugal, and there is dark muttering about the state of Britain’s finances. It is one thing to bail out the Greek economy, which is relatively small. But what will happen if they have to rescue Spain, Portugal, Ireland and even Britain?
In order to reassure the markets that these countries are able and willing to repay their debts, the international Shylocks are insisting that they must increase taxes and cut spending. But such a policy spells disaster for economies that still remain trapped in a recession with rising unemployment. “This is madness. If we cut state spending now, it will destroy the recovery!” But the plaintive laments of the Keynesians have no effect on the icy hearts of the international bankers, who are only interested in getting their money back – with a handsome return.
Europe’s troubles are not the only cause for concern. China, worried about increasing inflation and asset bubbles, has begun to cut lending. India’s central bank has raised reserve requirements and Brazil’s stimulus packet is being phased out. The big central banks of the rich countries are backing away from “quantitative easing”, printing money to buy longer-dated securities, and the emergency liquidity facilities they introduced at the height of the crisis are now coming to an end.
Since the main (virtually the only) motor force for the “recovery” was state expenditure, this is causing concern among investors, who, as we know, are motivated not by rational considerations but by the same kind of herd instinct that causes the wildebeest on the African savannah to stampede suddenly. There are already indications of such a shift. Asset prices and stock markets have fallen sharply, commodity prices have tumbled and there is increased volatility.
The MSCI World Index of global share prices has fallen by almost 10% from its peak on January 14th. In place of the earlier optimism about a “V”-shaped recovery, the pages of the financial press are now dominated by pessimism about a W-shaped double-dip recession. The fears are growing that governments will be forced to remove monetary and fiscal support too soon and the prospects of a recovery in 2010 will collapse in a new crisis.
America’s GDP figures indicate an increase in output at an annualized rate of 5.7% in the fourth quarter of 2009. But these figures are misleading because the growth was mainly due to firms rebuilding their stocks. The US economy is still shedding jobs (although at a lower rate), share prices are falling, and the housing market is still weak. There is no sign of an increase in consumer spending, and with plenty of idle capacity, firms are not likely to increase investments.
In Europe and Japan the situation is far worse. Alhough Japanese exports are recovering, the economy has slipped back into deflation. In the euro zone, recovery was showing signs of weakness long before the Greek crisis. Domestic demand has stalled even Germany, where households have no excess debt to pay off.
The recovery is evident only in some “emerging” economies such as India and Brazil, which have had strong growth in domestic demand and little spare capacity. China has maintained a high rate of growth thanks to a huge increase in government-directed lending, but for that very reason its economy is vulnerable to a sudden reduction in public funding. The outlook for the world economy is therefore extremely uncertain. Thus is what lies behind the nervousness of investors.
The truth is that the recovery depends on state aid, loans, guarantees to the banks and subsidies to the big manufacturers. Like a decrepit old man on crutches, the capitalist system is propped up by government stimulus. This is even more the case with weak capitalist economies like Greece. The speculators are hovering round it like vultures circulating above a wounded animal, waiting for the kill. If Greece goes under, the investors will lose confidence in other heavily indebted governments (Spain, Portugal, Ireland...) and this can trigger a chain reaction that can affect even the stronger economies and their currencies.
The danger is that the big rich economies will repeat the mistakes made in America in 1937 and Japan in 1997, when the government – thinking the worst was over increased taxes and tightened monetary policy, pushing the economy back into recession. Bourgeois economists and politicians are always telling us that they have “learned the lessons of history”, to which Hegel long ago replied that anybody who studies history can only conclude that nobody has ever learned anything from it. That is amply conformed by the study of economic history, where the capitalists constantly repeat the mistakes of the past.
Crisis of the bourgeois
Revolution always begins at the top, with crises and splits in the ruling class. The growing divisions in the US ruling class shows that they are in a blind alley. The clashes between Keynesians and Monetarists, between Republicans and Democrats, are an indication of the seriousness of the crisis. Obama tries to be all things to all men, but in reality displays complete impotence. The constant vacillations of Obama are a reflection of uncertainty and lack of any real perspective of the bourgeoisie as a whole. He is a master at demagogically exuding confidence and inspiring hope in ordinary Americans. But this rhetoric is empty of all real content, and this emptiness has been cruelly exposed by events.
The splits and vacillations of the bourgeois in Europe and America are a reflection of the depth of the crisis. They placed all their hopes on an economic recovery. But this is like a mirage that vanishes every time you get close to it. The central problem is not credit but overproduction, which manifests itself as overcapacity. Output remains far below its potential. This is the greatest condemnation of capitalism and a clear proof that it has outlived its historical usefulness.
The stagnation of the productive forces and the remorseless growth of unemployment – even at a time when the recession is supposed to be over – tell the same story. The problem of the huge and unsustainable deficits of Greece, Spain and Portugal is not the cause of the problem but only a reflection of it.
The bourgeois economists have foreseen nothing and understood nothing. On 21 October 2009, the Financial Times wrote: “As late as 2006, it was widely agreed the kind of disaster that was about to unfold was simply impossible.” They reacted to a crisis that they thought was “simply impossible” by resorting to methods that they also considered “simply impossible”: pumping enormous amounts of money into the financial system and therefore creating deficits that are unprecedented in peacetime.
Now the same bourgeois say that these deficits are dangerous, and that governments need to do more to control them by brutal cuts in living standards. From the standpoint of orthodox bourgeois economics this is undeniable. But then they are left with the contradiction that in order to achieve economic growth, any attempt to carry out such a policy will have the opposite effect.
The bourgeoisie finds itself trapped in an insoluble dilemma. At the meeting of the G7’s finance ministers on February 6, they concluded that it was too early to begin withdrawing state aid. But they were unable to agree on a plan to prevent a fiscal catastrophe. They only have one solution for the huge deficits caused by the bail-out of the capitalist system: a policy of brutal cuts, austerity and counter-reforms for a whole generation. But they have a small problem: such a policy will meet with the resistance of the working class. Greece shows just that.
Nowadays workers in many countries consider it normal and an automatic right that when they finish working at 60 or 65 they will receive some money from the state. But under capitalism it is not normal and it is not an automatic right. The first man to introduce pensions was Bismarck. This reactionary Bonapartist kindly introduced pensions for everybody over 70 years of age, at a time when in Germany the average life expectancy was 45.
Euro zone governments have borrowed a record €110bn from the markets so far this year, forcing up borrowing costs for those countries with the weakest public finances as they pay a heavy price for their huge debt levels. The solution of the bourgeois is to cut public spending rather than raise taxes. Some even talk openly of abolishing the state pension altogether, and in the long run, if they are not defeated by a movement of the workers, this will be placed on the order of the day. They will begin to test the ground with measures like raising the retirement age. France is already moving in that direction and some other countries have already tentatively moved in the same direction.
Capitalism moves through booms and slumps. At a certain point the capitalist world will inevitably enter a period of industrial recovery – in some countries we have already seen the first signs of this. This is an organic law of capitalist society. However, economic recovery in no sense indicates the re-establishment of equilibrium in the class relations in society. This is shown by the crisis of Greek capitalism, as the Financial Times clearly understands:
“The Greek turmoil reflects a wider crisis of imbalances in the 16-nation eurozone, and everyone will have to make a contribution to bring this wider crisis under control. Specifically, Greece and a few other countries - notably, Portugal and Spain - have very big current account deficits, while Germany, Europe’s champion exporter and the eurozone’s largest economy, tends to run big current account surpluses. The Greek deficit was a remarkable 12 per cent of gross domestic product in the third quarter of 2009, and Portugal’s stood at 10 per cent.”(FT, February 1, 2010)
The Greek crisis is without doubt the most dangerous crisis in the euro zone’s history. The EU’s highest authorities have told Greece to slash its wage bill, speed up pension reform and set aside 10% of expenditure to pull itself out of the present critical state. Papandreou has done a deal with opposition conservative leaders in an effort to prevent social unrest. But the prospect of three years of economic austerity is a finished recipe for an explosion of the class struggle in Greece.
This is understood by the serious strategists of capital, like Edwards, who writes: “Unlike Japan or the U.S., Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain,” Consigning the countries in southern Europe with the weakest finances “to a prolonged period of deflation is most likely to impose too severe a test on these nations.”
The ruling class and the EU is exerting brutal pressure on the leadership of the PASOK, which, using the excuse of debt and deficit, will try to impose a harsh programme. This is provoking a huge reaction from the working class who voted for the PASOK and are now entering into struggle to defend their living conditions. On February 10, public-sector workers, from teachers to rubbish-collectors, stopped work all over Greece. Despite the persistent rain they came onto the streets to chant slogans against a pay freeze in basic pay combined with a slashing of allowances. A protest by Greek farmers was even more militant. Their tractors have been blocking many Greek highways, and the main border crossing with Bulgaria, for three weeks.
The Socialist leaders in Greece are trying to push through a programme of tough measures to raise taxes and curb spending. The conservative opposition that was kicked out last October, wholeheartedly backs these measures. Its leader, Antonis Samaras, was thanked by the European Commission president, José Manuel Barroso, for his “constructive attitude”. But the consensus will not last. The pay cuts will cause much pain, and the bourgeois are now preparing for the “reform” of the pension system, which will raise the average retirement age in Greece from 58 to 63. Even these measures will not be sufficient to raise “productivity and efficiency” as the bourgeois demand.
The Greek government has announced a sweeping overhaul of the tax system, which includes a drive to collect more revenue from the rich. But the rich have a thousand ways of avoiding the payment of tax – particularly in Greece. The central problem is the depth of the recession, which, despite all the confident predictions, has not been overcome. The present recovery has a weak and unstable character.
The Bank for International Settlements (BIS), which includes the Bank of England, the US Federal Reserve and the European Central Bank, said it feared that the problems of the world's banks are far from solved and could easily trigger a so-called “double dip” or “W-shaped" downturn. “A significant risk is therefore that the current stimulus will lead only to a temporary pick-up in growth, followed by protracted stagnation.” An L-shaped recession would be even worse than the current situation. It would signify a period of “stagflation”, like that experienced by Japan in the 1990s.
Scarcely had the ink dried on a statement by European leaders supporting Greece in its struggle to finance its debts when more bad news emerged from the euro zone. Figures released on Friday, February 12 showed that GDP in the 16-country currency zone rose by just 0.1% in the three months to the end of December compared with the previous quarter. That there was any improvement at all was largely down to France, where a burst of consumer spending lifted the economy by 0.6%. In the region’s other big countries, GDP was either flat—as in Germany—or falling, as in Italy and Spain.
France is doing better, mainly because the big role the state plays in the economy. Government spending rose by 0.7% in the fourth quarter, after similar increases in the previous two quarters. But France cannot continue to grow quickly. Its budget deficit was 8% of GDP last year: France is hardly a model of fiscal rectitude and may struggle to contain its rising public debt.
In Spain GDP fell by 3.1% in the year to the fourth quarter, and demand is weighed down by debts accumulated during the long housing boom. The unemployment rate is close to 20%. Zapatero has tried to avoid conflict with the unions, but is now subjected to the merciless pressure of the bond-market. This means he will be forced to cuts and counter-reforms. There is no doubt that the Spanish workers will react in the same way as the Greek workers are doing.
The fiscal crisis in Greece has increased the pressure on other countries to put their public finances in order. This will have two effects: it will reduce GDP growth across the euro zone, and it will lead to an intensification of the class struggle everywhere. The rapid rise in unemployment tends to act as a brake on economic strikes temporarily, but the accumulated discontent in society is building up slowly and can suddenly break out. The recent general strike in Greece is an indication of this.
The initial impact of the recession across most of Europe was a significant lowering of the level of strikes. Workers feared losing their jobs and hoped they could survive until the next recovery. However, this dampening effect does not last forever. At a certain point, as workers become aware of the fact that keeping their heads low is no solution, it turns into its opposite, and from fear the workers’ mood turns to anger and a desire to fight back. This is what we are beginning to see now in some countries of Europe. And it is what concerns the serious strategists of capital internationally.
The Economist writes:
“Still, there is a question over how long that willingness [to accept tax increases] will endure as Greeks count the cost of recession. Banks have squeezed lending to consumers and small firms. The number of bounced cheques has reached record levels. In such a climate, the mood of nervous anxiety could give way to seething resentment.”
And the article continues:
“[… Papandreou] is walking a tightrope. In a country that saw Europe’s worst riots of recent times just over a year ago, social peace is fragile. But the biggest threats come from fringe groups, such as ultra-leftists and disaffected youths, not from the mainstream unions or parties.” (The Economist, February 12, my emphasis, AW)
These comments are applicable to every country in Europe. Greece is special only insofar as it is one of several weak links of European capitalism. But in all the countries of Europe the bourgeois parties support cutting living standards of the workers to “solve the crisis”, and the reformist leaders, some reluctantly (Zapatero), some enthusiastically (Brown) obediently fall into line. The workers will not stand idly by and watch the demolition of all the conquests of the last 50 years. We are already witnessing the beginning of a huge movement of the working class in Greece. In the next period this will be replicated in one country in Europe after another.
London, 15th February 2010.