The crisis of the euro resembles a long drawn-out death agony. There is one “decisive” summit after another, each proclaiming a definitive end to the euro crisis. The markets rally for a few hours or days and then fall once more. The index of the European stock markets resembles a thermometer that tracks the process of a terminally sick patient.
This turbulence in the markets is an accurate reflection of the state of mind of the bourgeoisie, characterised by extreme nervousness. This in turn is a reflection of the fact that the present crisis is unparalleled in its scope. The bourgeoisie finds itself adrift in uncharted waters with no map or compass.
The future of the euro
We must never lose sight of the fact that the real barriers to growth under capitalism are:
- Private ownership of the means of production, and
- The nation state.
The creation of the EU was an attempt on the part of the European bourgeois (mainly the French and Germans) to overcome the limitedness of the nation state by creating a common market, which was supposed to lead to greater union. The introduction of a common currency was supposed to constitute a major step in that direction.
However, as we explained in advance, on a capitalist basis, the attempt to create a rigid currency arrangement that was supposed to be equally applicable to economies as different as Germany and Greece was bound to fail. It could work as long as the boom lasted, but the advent of a slump has brought to the fore all the national contradictions and antagonisms. The drive towards European union has reached its limits and is going into reverse. The euro (and even the EU itself) is facing collapse.
The euro is not the cause of the crisis of European capitalism, but it has enormously exacerbated the problems, especially of the weaker economies like Greece and Italy. In the past, the Greek and Italian bourgeoisie could partially get out of trouble by devaluing the currency. Now this route is barred to them. The only alternative is what they now refer to as an “internal devaluation”. As products cannot gain competitiveness through the devaluation of the currency, wages must be driven down instead, in both the public and private sector. This means a regime of permanent austerity and attacks on living standards.
No matter what the rulers of Europe now do, they will be wrong. If they continue to attempt to prop up the euro, it will place an intolerable burden on the financial resources of the EU. It will mean years and decades of cuts, austerity and falling living standards. This is a finished recipe for the class struggle. But if the euro collapses, it will be an economic catastrophe that will plunge the whole of Europe (not just the eurozone) into an even deeper crisis.
This dilemma expresses itself in splits and tensions between the different national bourgeoisies, notably between France and Germany. Francois Hollande won a sweeping electoral victory in both the presidential and parliamentary elections. He will be under pressure to carry out at least some of the reforms he promised in the election campaign. But he has also promised to reduce the public deficit to 3% next year. These two objectives are mutually exclusive.
On the other hand, Angela Merkel is demanding the full implementation of austerity and cuts. The German bourgeoisie is demanding discipline and balanced budgets. Hollande demands growth; Merkel demands cuts. More precisely, the French ruling class wants the German ruling class to pay to stimulate the economy of other European countries, while the German ruling class wants the other capitalists to make their workers pay for the crisis. How can the two sides agree? Thus there is an open split in the heart of Europe.
The pessimism of the ruling class was expressed by the words of The Guardian's economics editor Larry Elliot on the G20 summit:
“It would be naive to imagine that the G20 is preparing a blueprint for global recovery or that the euro zone crisis will soon be over. Central banks are on high alert to cope with the fallout from Greek elections. Why? Because at the moment the global economy can be divided into nations that are in recession, about to go into recession or rapidly losing momentum. For the moment there are no good outcomes, just bad and really bad." (The Guardian, 17 June 2012)
The question of debt
The most graphic expression of the crisis is public debt. However, this is not the cause of the crisis but only a symptom of the sickness of capitalism. Public debt and above all budget deficits have significantly grown as a result of the bail out of the banks and the economic recession itself (which decreases tax revenues, while it increases social expenditure in unemployment benefits for instance).
In every capitalist boom there is an element of speculation, which is only revealed with the onset of crisis. The only difference with this crisis is the truly vast scale of the speculation. For the past three decades the bourgeois attempted to avoid a slump by an unprecedented expansion of credit. In particular the bourgeoisie of the USA indulged in a veritable orgy of speculation based on a huge expansion of credit and low interest rates. This was actively encouraged by Alan Greenspan and the Federal Reserve.
Marx explained that the role of credit under capitalism is to allow it to go beyond its normal limits. A crisis of overproduction can be delayed for a time by artificially expanding demand through consumer credit. The banks actively participated in this orgy by extending credit to people who would never have been considered eligible in the past. This was the basis for the property bubble in the USA and other countries.
The same phenomenon occurred in Europe, especially in Iceland, Spain and Ireland. But in all countries the banks were active and enthusiastic participants in what amounted to a gigantic swindle. As long as the upward spiral continued, everyone was happy. Credit was easy and large profits were being made. But in the end the limit was reached and the whole unsound structure began to collapse.
The result was the banking crisis of 2008. The attempt to save the banking system by injecting huge amounts of state money is one of the main factors behind the recent massive increase of state debt, which now the working class is being asked to pay for. All the factors that combined to push the world economy upwards now combine to push it into an uncontrollable downward spiral. The bourgeoisie is now confronted with the consequences of its previous excesses. The consequence is a mountain of accumulated debts: private, corporate and public. The question is: who pays? It is the same question that was posed in France in 1789 and, just as then, the answer will have revolutionary implications.
Marx explains that when the crisis breaks, credit dries up, productive investment grinds to a halt, factories are closed and workers are laid off. The bourgeois now demands that all debts be paid. The moneylenders are merciless. Promissory notes are no longer accepted: give us hard cash! That is their implacable demand, which applies to countries and governments as well as companies and individuals.
Germany and the Euro
The euro was the brain-child of the German ruling class. The reunification of Germany gave new life to old ambitions. Although in theory France and Germany are equal partners, everyone knows that Germany is the boss. The German bourgeoisie has in its hands a powerful economy based on a strong industry. The Bundesbank holds the purse strings of Europe.
During the boom living standards generally went up in Europe, but it was a very uneven process. Even in the boom the bourgeois put remorseless pressure on the workers to increase productivity, to work harder for longer hours. There was an inexorable process of casualisation, with full-time employment being displaced by part-time contracts on lower wages and worse conditions. The workers felt better off because of overtime working, the employment of entire families, the lowering of the prices of consumer goods, partly as a result of cheap Chinese imports and, above all, the unrestrained expansion of credit.
In Germany, which is heavily dependent upon the export of its industrial products, the capitalists squeezed the workers mercilessly to extract the last ounce of surplus value. In the decade prior to 2008 unit labour costs rose by 30% in Italy, 35% in Spain, 42% in Greece, but only 7% in Germany. German real wages were held down, productivity soared and exports boomed. But somebody had to import what Germany exported.
The creation of the euro therefore benefitted the German capitalists. It provided them with a big market for their exports (60% of which go to EU countries), which were made highly competitive by a combination of lowering wages and the application of the most modern machinery. In order to expand the market for its exports, Germany pressed other countries to accept loans to increase demand. The money that was lent to Greece and other countries was used to purchase German goods, which they did on a massive scale.
Now the German bourgeois moan that they were deceived. They complain that the Greeks falsified the books to gain entry into the eurozone. That is very likely true. But can the German bourgeoisie not do simple arithmetic? Can they not add up? Or, if the answer is negative, did they not possess competent accountants? Of course they did. But in 2001 they were not interested in examining the figures too closely, any more than the bankers in the USA, Spain and Ireland who were foisting loans for houses on families with little or no disposable income.
If Germany is an exporter and a creditor, other European nations must be importers and debtors. That debtor-creditor relationship was all very well while the economy was booming. But the crisis of 2008 cruelly revealed the real situation. The moment of reckoning had arrived. But when the bill was presented, there was no money with which to pay it.
The weakest link
Every chain always breaks at its weakest link. Greece is the weakest link in the chain of European capitalism. It is the sick man of Europe. But there are many sick men in this particular hospital. Some are already in intensive care (Greece, Ireland, and Portugal). Others are almost in the same condition (Spain and Italy). France and Belgium are not too far behind. The others are in the waiting room. But all will fall sick in the end.
The idea that it is possible for countries like Germany, Finland and Austria to cut themselves off from the general European malady is a delusion. There are no longer any national markets left in Europe. Europe has been shaped as a single market with a high degree of economic integration. The destiny of one will have a serious effect on the destinies of all. That is true of even the smallest, like Greece.
It may seem a paradox that the recent G20 summit in Mexico was obsessed by the Greek problem and especially by the outcome of the Greek elections. But even more paradoxical was what happened later. The bourgeoisie (in particular in the USA) was worried that a victory of Syriza would signify the immediate exit of Greece from the eurozone, provoking a concatenation of circumstances that would put in danger the future of the euro itself, provoking a deep slump on a world scale.
When this outcome was avoided by the narrow victory of Samaras and the New Democracy, the bourgeois breathed an audible sigh of relief. It might be expected that the EU (that is, Angela Merkel) would have thrown a lifeline to Samaras, or at least give some signal that he could interpret as a promise of future relief for the suffering Greek people. Instead, the German chancellor turned a stony face to Athens and warned that there was no question of renegotiating anything.
Merkel originally agreed to “help” Greece pay its debts, not out of generosity but because most of these debts are owed to German and French banks. The “aid” was made conditional on a ferocious package of cuts that has pushed Greece into a deep recession and reduced it to beggary. Far from solving the problem, it has made things far worse. Yet Merkel continues to demand austerity and “discipline”.
In reality, the German ruling class finds itself in a dilemma. On the one hand, they do not want to underwrite the debts of Europe and would be glad to see the back of Greece. On the other hand, they fear the consequences of a European banking crisis that would be the inevitable result of a Greek exit from the eurozone. This dilemma leads to a kind of paralysis of the will and constant vacillations, when decisive action is called for. We saw this again in the most recent EU summit. The leaders of the EU resemble the emperor Nero who fiddled as the flames rose on all sides.
The flames have reached Spain, which now finds itself in the eye of the storm of the European economic crisis. Greece, Ireland and Portugal are, in a literal sense, peripheral countries of the EU. But Spain is bigger than all three together. And Italy is one of the core countries of the EU itself. An economic collapse in these countries would therefore have the most serious consequences for the whole of Europe.
For 14 years (1994-2008), Spain avoided a recession. It had one of the highest rates of growth in Europe and was creating more jobs than any other country in the EU. It seemed as though the boom would last forever. But the boom was largely propelled by a speculative housing bubble, feeding on cheap and easy credit from the banks and particularly the cajas de ahorros (saving banks).
The end of the boom has brought all the contradictions to the fore. The Spanish housing market has collapsed. House prices have slumped and many families have lost their homes while thousands of properties stand empty. As a result, the construction industry is in crisis and many building workers have lost their jobs, swelling the ranks of the unemployed.
Unemployment now officially stands at 25%, the highest in the EU. More than half the youth of Spain are jobless. The growth of unemployment means a steep fall in demand and also in tax revenues. Further cuts will only aggravate the problem, as we have already seen in Greece.
Before 2007 Spain had a primary budget surplus and was actually paying off its debts. Now the deficit is the equivalent of 9% of GDP, and this is supposed to be cut down to 3% by next year.
Spain has been in recession for four years. Soon the unemployment benefit will run out, and many families will not be able to continue to keep up their mortgage repayments. This will lead to a new wave of repossessions, increasing homelessness, a further fall in house prices and the banks and cajas will be left with an even greater number of empty flats that nobody wants to buy.
As a result, the Spanish banking system is in a deep crisis. In order to prevent a total collapse, the EU was forced to hand over up to 100 billion euros, although this huge sum will not be enough to plug the black hole in the balance sheets of the Spanish banks. Nobody knows the true extent of the bad debts of the banks: 150 billion? 250 billion? It is impossible to say. But it is clear that the €100 billion loan is just the beginning.
This is clear to the markets, which have reacted accordingly. Nobody wants to buy Spanish debt unless they receive a punitively high rate of interest. The rate of interest has already reached 7%. Such ruinous rates of interest are impossible to sustain for long.
Even before the massive austerity cuts of the new PP government were announced we already saw wave after wave of strikes and regional and sector-wide mobilizations: the education sector in Madrid, civil servants in Catalonia and Valencia, the movement of the students in Valencia, the nationwide education sector movement, etc. The indignados movement, with mass demonstrations in May, June and October 2011 was also a reflection of this build up of anger and helped change the general mood amongst the working class.
Spain is following the same path as Greece, and the results will be similar, but on a much bigger scale. The Rajoy government is a government of crisis. Its electoral base is shrinking fast. With the leaders of PSOE being pushed towards national unity, the main beneficiary has been the Izquierda Unida (IU, United Left) coalition – to the left of PSOE – around the Communist Party which has significantly increased its votes. In the national opinion polls the IU has gone up from 6.9% in the November 2011 elections to 11.6% now.
This confirms the same leftward trend we have seen in Greece and France. The serious strategists of Capital are already warning of the revolutionary implications of massive cuts in public spending. A Financial Times article signed by Wolfgang Münchau and entitled “Spain has accepted mission impossible”, puts it in stark terms:
“Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give. Either Spain will miss the target, or the Spanish government will have to fire so many nurses and teachers that the result will be a political insurrection.” (our emphasis, FT, April 15)
The situation facing Italian capitalism is, if anything, even worse than in Spain, which has at least partly recapitalised its debts with the aid of the EU. But the level of indebtedness of Italy is still higher. This has been the case for many years, but now the situation has become critical.
Italy’s debt has reached 120% of GDP in the past, yet it did not cause serious problems because they could always devalue the Lira to gain a competitive advantage for Italian exports. In part, the Italian bourgeoisie bought social stability by maintaining a high level of debt. They could always find buyers for Italian debt in international markets. But all that has changed.
The advent of the Euro has blocked that exit. Italy has lost competitiveness to Germany, and the problem has been exacerbated by competition from China. The Italian economy has been stagnant for a long time. The lack of growth has led to a collapse of confidence in the markets, leading to a sharp increase in the interest Italy must pay to pay bondholders.
If we exclude interest repayments, Italy has a primary surplus. Under the “Left” government of Prodi, Italy actually began to pay off its debts. But with interest rates of six or even seven percent, the burden of debt becomes unsustainable. After a decade of economic stagnation, Italy cannot afford to finance its debt, which totals 1.9 trillion Euros. They are now finding it difficult to sell bonds that nobody wants to buy.
Since the road of devaluation is blocked, the only alternative is to launch an all-out attack on living standards. A few years ago, even before the crisis began, The Economist stated that, in order for Italy to recover its international competitiveness, it would have to sack half a million workers and those who remained would have to accept a wage cut of 30%. This is the real meaning of what is called an “internal devaluation”. It is the real programme of the Italian bourgeoisie.
The case of Italy highlights the central problem of the European bourgeoisie: the strength of the working class. For decades the workers of Europe have become used to a certain standard of living. They have conquered the conditions of at least a semi-civilized existence. The ruling class now finds it very difficult to take back the reforms and concessions of the past.
The problem is that the Italian bourgeoisie lacks a strong party and a stable government to implement this programme. Berlusconi failed to carry out what was needed. The “Left” government of Prodi went further, but was destroyed in the attempt. The “national unity” government of Monti has seen its support collapse in just a few months. All have foundered on the resistance of the Italian working class.
The road is open to an explosion of the class struggle in Italy, which will present the Italian Marxists with great opportunities.
[Note: this document is a Supplement to Perspectives for world capitalism 2012 (Draft discussion document) – Part One (and subsequent parts) and should also be read together with On a Knife's Edge: Perspectives for the world economy, A Socialist Alternative to the European Union and the The Crisis: Make the bosses pay! - Manifesto of the International Marxist Tendency