2011: Optimism or pessimism? – Part Two

For most of 2010 all eyes were fixed on Europe and the travails of the euro. The crisis of capitalism has revealed the existence of deep fissures in the EU. The first phase of the crisis was mainly characterised by defaults of the banks. The second phase is characterised by defaults of states. [part 1]

The crisis of the euro

Latuff_n_DromosIceland was the first state to go bankrupt. But that was, after all, a tiny island off the coast of Europe. Even so, the Icelandic crisis had serious effects in countries like Britain and Holland.

The next victim was Greece – a member of the EU. But the Greek crisis was “solved” by the intervention of Germany and other EU states, which set up a special fund of around a trillion dollars to deal with such cases. But in reality nothing was solved. In the best case scenario the Greek crisis has been postponed to a future date. And the “aid” from the EU was obtained at the price of savage cuts in the living standards of the Greek people, a deep recession and mass unemployment.

If the leaders of the EU thought that these measures would be sufficient to stop the rot, they were sadly mistaken. The Irish economy, threatened with complete collapse, was compelled to seek assistance from the EU. This spelt further attacks on living standards and a crisis of government. Immediately after the Irish crisis, Portugal has become the latest target of attacks by the capitalist speculators.

The IMF, OECD and European Commission put euro-area potential growth at around one percent. Germany is the source of much of the recovery, and its growth has benefited some other economies in Europe. But this is dependent mainly on Asia. On the other hand, the rate of unemployment in the EU remains stubbornly high, at 10.1 percent, rather than falling as it should in a recovery. This is a clear symptom of the underlying sickness of the system, which is manifested as the crisis of the euro.

The success of German-based firms in Asia’s export markets has benefited suppliers in Eastern Europe, such as the Czech Republic. This is now really a satellite of German capitalism; around a third of its exports go to Germany. Poland’s economy has been mainly held up by a big fiscal stimulus. But its budget deficit may hit 8% of GDP this year. And Hungary is in a desperate state. Its credit status is only a little above junk status. The crisis in Eastern Europe can still affect countries like Austria, Germany and Sweden.

Europe faces threats on all sides. The euro area is now a source of stress, both financial and macroeconomic. Government spending cuts will lead to a fall in demand and growth. Tied to a single currency, they cannot hope to improve their competitiveness by devaluation. From a capitalist point of view, the only alternative is to screw down wages. The fiscal tightening will begin in earnest this year. But this will further reduce demand, deepening the recession and increasing unemployment.

In Britain the recent increase in VAT will cause a reduction of demand by two billion pounds and combined with other cuts will increase unemployment. Already Ireland and Greece are in deep recession and the austerity policies will make it hard for them to climb out. Spain is barely growing and has a budget deficit approaching 9% of GDP. Portugal’s government has been forced to take action to cut a deficit of similar size, provoking a general strike in the process.

Germany decides

The crisis of the euro has underlined the fact that power in the European Union is now firmly in the hands of Germany. The pretensions of Nicolas Sarkozy have been cruelly exposed. It is in Berlin, not Paris, that the future of the EU and the euro will be decided. In the past, a polite fiction was maintained of a Franco-German condominium. Now power has passed to the other side of the Rhine.

Although France remains close to Germany, and tries to maintain the illusion of a Paris-Berlin axis, its long-term interests are not the same as Germany’s. Its ties are with Africa, while Germany looks to Eastern Europe, the Balkans and Russia to strengthen its power and influence. The enlargement of the EU to the east has further strengthened Germany at the expense of France.

On agriculture, for example, France’s interests favour the wasteful Common Agricultural Policy (CAP). There is strong pressure to rethink the CAP after 2013. Despite German opposition, they have agreed to a joint statement with France that farming is a “strategic activity” and that Europe “needs a strong CAP”. The French regard this as a victory. But the fact is that on all the fundamental issues, Mrs Merkel has got what she asked for, while Sarkozy has finally learnt the lesson: “he who pays the piper calls the tune”.

Thanks to the strength of its exports, Germany has pushed GDP growth to 3.7%, against only 1.6% in France and a euro-zone average of 1.7%. Between 2005 and 2009 Germany’s share of world exports grew, whereas France’s shrank. No French government has balanced its budget for 27 years. In 2011 France’s budget deficit is expected to be over 6% of GDP, whereas Germany’s may be under 3%. These figures place France closer to Greece than to Germany in the eyes of the markets. This is very difficult for the French bourgeois to accept, but accept it they must.

Germany’s economic supremacy inevitably expresses itself as a desire to assert its political weight. It is no longer inclined to hide its national interests. Having succeeded in establishing its domination in Europe, Germany sees no reason why it should pay the price for other people’s problems. It was compelled to underwrite the deficit of Greek capitalism, and then Irish capitalism. But it does not have any possibility of solving the economic problems of Spain, let alone Italy.

During the Greek crisis last spring the EU belatedly put together €750 billion ($980 billion) in bail-out funds. Then came the crisis in Ireland. The European Central Bank (ECB) bought €2 billion ($2.6 billion) of government bonds in the week ending December 3rd, taking its cumulative purchases since May 2010 to €69 billion.

Jean-Claude Juncker, the prime minister of Luxembourg, tried in vain to convince a meeting of euro-zone finance ministers on December 6th to adopt a plan he had worked out with the Italian finance minister, Giulio Tremonti. This would commit euro members to issue collective Eurobonds. According to this plan, the richest and most creditworthy countries in Europe should use their privileged position to prop up the credit rating of their less fortunate brethren.

Such “E-bonds” might eventually account for up to 40% of the euro zone’s GDP. Juncker and Tremonti suggested that their plan would “send a clear message to global markets and European citizens of our political commitment to economic and monetary union and the irreversibility of the euro.” A clear message was immediately sent by the Germans and their allies to the authors: that they should insert their plan in a place where the sun never shines. Another idea was put forward by Belgium: for the bail-out fund to be enlarged. This met with no greater success. “We can’t have a new debate every week,” grumbled Germany’s Wolfgang Schäuble.

Germany is increasingly reluctant to spend more treasure saving its neighbours. Yet even German bond yields are starting to rise. A question mark is therefore posed over the future of the euro itself. The recovery of the world economy is threatened by the euro crisis. This in turn threatens to spread chaos throughout the money markets of the world, and push the almighty dollar off its perch. On December 9th The Economist commented:

“That the ECB has been pushed so far is because seemingly small financial tremors can quickly turn into earthquakes. This is a particular worry in the euro zone, where countries and banks alike are heavily exposed to one another’s debts. Financial integration has been celebrated as one of the big successes of the euro. But it also means that more trouble in peripheral countries could easily spread to the entire euro-zone economy.”

The same journal has drawn the most pessimistic conclusions:

“Worse, the financial consequences of a shift to a world where a euro-area country can go bust are only just becoming clear. Not only do too many euro-zone governments owe too much, but Europe’s entire banking model, which is based on thorough integration across borders, may need revisiting. These difficulties would tax the most enlightened policymakers. The euro zone’s political leaders, alas, are a fractious and underwhelming lot. An even bigger mess seems all but certain in 2011”.

Can Asia save the world?

The hopes of the bourgeois economists are based on the rapid rate of growth in places like China and Brazil. But in the first place, this growth does not compensate for the shrinkage of the US market, and secondly, there is no guarantee that this growth will continue in 2011. At first sight these hopes seem to be well grounded. From Shenzhen to São Paulo the economies have been soaring ahead. Spare capacity has been used up and foreign capital is pouring in. But this rapid growth is limited by consumption. And consumption in Europe and the USA is not growing but shrinking.

The younger and more robust capitalist economies of the “emerging” countries have a number of advantages: bigger and more youthful populations and a huge reserve of cheap labour in the countryside. They have had the advantage of higher productivity and (at least initially) a higher rate of profit, and consequently the additional benefit of a huge influx of foreign capital. The law of combined and uneven development has allowed them, on the basis of this huge investment boom, to construct factories utilising the most advanced machinery and technology imported from more advanced countries.

However, this progress must sooner or later come up against the inherent contradictions of capitalism. In every capitalist boom in history there is an inherent tendency to overshoot the market, to produce too much for the market to sustain. The immense productive power that is built up to extract more and more surplus value from the workers goes beyond the restricted power of consumption of society. The result is a crisis of overproduction.

The limits of the capitalist boom in the USA and Europe were reached in 2008 (in Japan a decade earlier). The moment will be reached when the same contradictions make themselves felt in China and the other “emerging” economies. Profitability in China, as one could expect, is falling back to more normal levels. A new generation of younger workers is no longer prepared to accept the Dickensian conditions of work that the first generation, straight from the villages, was prepared to swallow. There has been a marked increase in worker protests.

In order to offset the slump of 2009, governments have loosened monetary discipline. This policy can lift growth in the immediate term but in the longer term it is unsustainable because it leads to inflation. Worries about asset bubbles have been replaced by a fear of overheating. China is not the only example of this. Brazilian inflation has surged above 5% and imports in November were 44% higher than the previous year. In order to stop prices accelerating, the “emerging economies” will need to raise interest rates, as China is already doing.

To some extent countries like China can offset declining demand in export markets by increased domestic consumption. But the domestic market too has definite limits and sooner or later these must be reached. The serious economists are expressing concern about the “overheating” of the Chinese economy. On Christmas day, the People’s Bank of China raised key interest rates, the second such move in less than three months. The amount of money banks keep in reserve has also been restricted to try to reduce bank lending levels.

This was the latest in a series of actions taken by China’s central bank to try to combat rising prices. The problem is that this can cause growth to slow sharply. The latest data showed that China's economy grew at an annual pace of 9.6% in the three months to the end of September from 11.9% in the first quarter of this year. If they do not take measures now, there will be higher inflation, necessitating an even bigger tightening at a later date. Either way, the period of rapid growth will come to an end, causing shock waves throughout the world economy.

Will the contradictions lead to war?

It is increasingly clear that the world economy is fragmented into three segments: the big “emerging” markets (China, India, Brazil), the euro area and the USA. It is also increasingly clear that they are moving in different directions. This divergence is increasing the chances for friction and opening up new contradictions. What happens in one part of the global economy has immediate repercussions for the rest. The central contradiction is simply stated. Every country wants to export. But in order to export, somebody has to import! We are entering into a period of growing protectionism and tensions between the main capitalist nations.

The tendency towards protectionism is clear in the USA, where loud voices are raised in Congress demanding restrictions on Chinese imports. This is very dangerous ground. Protectionism would provoke retaliation from America’s rivals and threaten to unravel the fragile edifice of world trade. Globalization would be thrown into reverse, with catastrophic consequences for the world economy.

The divergence between the three major components of the world economy poses serious risks to the entire edifice of globalization. Europe and America are obsessed with internal problems and have adopted contradictory strategies for dealing with them. They are in fact moving in different directions. On the one hand, America is following a loose monetary policy, allowing the deficit to rise alarmingly. On the other side of the Atlantic, there are concerns about sovereign defaults in the euro zone.

The budget cutting austerity plans of Europe poses a grave danger to the future of the euro, which unsettles the markets. But then, America’s tactic of eat, drink and be merry, and to hell with the deficit is hardly sustainable, either. These worries are reflected in a steady flow of capital to the “emerging economies” like China, which are awash with cash in sharp contrast to the debt-ridden West. This is what makes their central banks reluctant to raise interest rates and dampen down inflation. The Economist warned: “A more divided world economy could make 2011 a year of damaging shocks.”

It is clear that the global crisis of capitalism will mean a sharpening of tensions between Europe and the USA, between the USA, China and Japan and between Russia and the USA. In the past such tensions would have led to a world war. In the 1930s it was not the Keynesian policies of Roosevelt’s New Deal that solved the crisis. It was the outbreak of the Second World War that eliminated the mass unemployment of the 1930s through massive arms spending and the wholesale destruction of the means of production during the war. This has raised the question in some people’s minds of a new world war. However, the situation now is entirely different to that of 1939.

The collapse of the USSR and the colossal power of US imperialism mean that a world war is ruled out. With an annual arms expenditure of more than $700 billion, no power on earth can stand against the USA. On the other hand, there can be no question of either the USA or any other country invading China to turn it into a colony, as happened before the Second World War.

A world war is therefore ruled out. But there will be constant “small” wars, like the wars in Iraq, Afghanistan and Somalia. The conflict between Russia and the USA can lead to wars like the war in Georgia. In Africa the undeclared war in Somalia continues on its bloody path to further chaos, while Côte d’Ivoire teeters on the brink of a new civil war. The instability in Asia was underlined by the armed conflict between North and South Korea. US forces have participated in the South’s latest military exercises. A new war can break out in Yemen at any time. There is no lack of explosive material on a world scale.

The recent revelations of WikiLeaks have raised at least partially the thick curtain of lies that conceal the ugly reality of bourgeois diplomacy. Diplomacy is the continuation of war by other means. But the increase in diplomatic tensions is a reflection of the general instability, as is the uncontrollable spread of terrorism. They are a symptom of the underlying crisis. To bemoan these phenomena, as sentimental pacifists do, is as pointless as it would be for a doctor to take out a handkerchief and weep at the symptoms of a disease. What is required is not tears but a precise diagnosis and an effective prescription.

The symptoms we see on a world scale are merely an expression of the underlying cause, which is the contradiction between the colossal potential of the productive forces and the narrow limitations of private property and the nation state. The capitalists cannot find a way out of the crisis by taking the road of war as they did in 1914 and 1939. Therefore, all the contradictions will be expressed internally, through a growth of the intensification of the class struggle.

Changing mood

The first effect of the crisis was one of shock, not only for the bourgeois but also for the workers. There was a tendency to cling to jobs and accept cuts in the short term, especially as the union leaders offer no alternative. But this will be replaced by a general mood of anger and bitterness, which will sooner or later begin to affect the mass organisations of the working class.

The attempts to generate confidence clash head-on with the prevailing mood of the public in Europe and America. According to the Pew Research Centre, only 31% of Britons, 30% of Americans and 26% of the French have confidence that their countries are going in the right direction. This indicates a malaise at all levels of society. People no longer have any trust in the pronouncements of the politicians. There is a growing feeling that none of the existing parties and leaders represents the ordinary people.

Changing reality impinges upon consciousness only gradually. However, at a certain stage quantity becomes transformed into quality, producing a sudden leap in consciousness. Already we see the beginnings of revolt. This naturally begins with the youth, which on the one side are the first victims of the crisis and in the second place are highly sensitive barometers for the moods of discontent that are maturing silently in society. The revolt of the students in Britain is the most striking indication that this is beginning. This phenomenon is not confined to Europe. Even before the New Year there was an uprising of the youth of Tunisia against unemployment, which has now spread to Algeria.

In the USA the inflated globe of false hope lifted by Obama has been punctured like a tire passing over a nail. The Republicans have no alternative programme at all and if they returned to office we can expect them to fuel the fires of anger and resentment of an embittered middle class. For a long time every generation of Americans could look forward to living better than their parents. Now less than half of Americans think their children’s living standards will be better than theirs. This conclusion is the result of experience: the average real income of workers in the USA has not improved since the mid-1970s. Social mobility in America is now among the lowest in the industrialized world.

Everywhere there is ferment in society. Even in China, where the economy is still going forward at a rapid pace, the bad conditions and merciless exploitation of the workers has led to a wave of protest suicides and strikes. In Europe increasingly militant and violent mass protests are taking over on the streets of Athens, Dublin, London, Madrid, Paris and Rome.

In Spain there was a general strike in September. In Italy there have been big protest demonstrations. France has been shaken by a series of mass strikes and demonstrations. In Italy, the metalworkers’ union (FIOM) organized a mass demonstration of up to half a million in Rome. In Portugal the recent general strike, followed by 65 percent of workers, was the biggest since the Revolution. In Greece, where the movement has acquired an explosive character, one general strike has followed another.

In Venezuela the Bolivarian Revolution has reached a decisive turning-point. The counterrevolutionary opposition accuses Hugo Chávez of launching a coup against other branches of government, after the outgoing national assembly approved new powers for 18 months. The measures, taken days before a new legislature with a large opposition minority is due to be sworn in, prepare the way for an open showdown between left and right. In Ecuador an attempted counterrevolutionary coup by the police was defeated by the masses and troops loyal to the government of Rafael Correa.

All these facts indicate that we have entered a new period, a period of enormous turbulence and instability – a period of revolution and counterrevolution that can last for years, with ebbs and flows. The world situation is full of dangers for the bourgeoisie. Let us remember that in England in the 17th century and in France in the 18th century, the great bourgeois revolutions were sparked off by the question of huge state deficits and who would pay for them.

What is missing is leadership. This is the central contradiction. The objective conditions for socialist revolution are maturing rapidly everywhere, but everywhere consciousness is lagging behind the objective situation. Many workers have not yet understood the seriousness of the crisis. Above all, the mass organizations and their leaderships – both in the trade union and political sphere – are lagging behind events. They reflect the past, not the present or the future.

It is an irony of history that precisely at this moment they have renounced all claims to stand for a revolutionary change of society. Now history is taking revenge on them. The degeneration of the mass organizations has reached unheard-of depths in the last period. The Social Democrats have abandoned all pretence to standing for socialism and the former “Communists” have abandoned all pretence to standing for communism.

The crying contradiction between the needs of the objective situation and consciousness will have to be resolved. This can only be done by the masses passing through a series of experiences. All the existing parties and leaderships will be put to the test. There is growing discontent in all the mass organizations. It will grow as the crisis unfolds and the policies of the leadership are exposed in practice.

On the basis of painful experience, the workers and youth will come to understand the need for a fundamental change in society. The ideas of Marxism will find an increasing echo among the new layers who are being awakened to political action. The old organizations will be shaken from top to bottom. There will be a whole series of crises and splits, in which the old right-wing leaders will be vomited out. Gradually, a mass left wing will crystallize, which will be open to Marxism.

Those sceptics who moan about the alleged “low level of consciousness” of the masses merely show that their knowledge of Marxism consists only of undigested scraps. Their pedantic approach to the class struggle is a toxic mixture of ignorance and intellectual snobbery. All the impotent jeremiads of the sceptics will be confounded on the basis of the titanic events that are being prepared. Unlike the eunuchs, the masses can only learn through struggle. There will, of course, be many defeats, mistakes and setbacks, but through all these experiences, the movement will learn and grow. There is no other way.

Step by step, the disintegration of capitalism is preparing the way for revolutionary developments. The road to great social transformations is prepared by a whole series of partial struggles. This is the necessary preparatory stage in which we find ourselves. In the first decade of the 19th century, Hegel, whose dialectical method so brilliantly anticipated Marx, wrote the following inspiring words, which capture the spirit of his age, and of ours also:

“For the rest it is not difficult to see that our epoch is a birth-time, and a period of transition. The spirit of man has broken with the old order of things hitherto prevailing, and with the old ways of thinking, and is in the mind to let them all sink into the depths of the past and to set about its own transformation. It is indeed never at rest, but carried along the stream of progress ever onward. But it is here as in the case of the birth of a child; after a long period of nutrition in silence, the continuity of the gradual growth in size, of quantitative change, is suddenly cut short by the first breath drawn – there is a break in the process, a qualitative change and the child is born. In like manner the spirit of the time, growing slowly and quietly ripe for the new form it is to assume, disintegrates one fragment after another of the structure of its previous world. That it is tottering to its fall is indicated only by symptoms here and there. Frivolity and again ennui, which are spreading in the established order of things, the undefined foreboding of something unknown – all these betoken that there is something else approaching. This gradual crumbling to pieces, which did not alter the general look and aspect of the whole, is interrupted by the sunrise, which, in a flash and at a single stroke, brings to view the form and structure of the new world.” (Hegel, The Phenomenology of Mind, Preface.)

Old Hegel, through his idealist spectacles, could see the future only in a dim outline. Using the method of materialism, Marx and Engels transformed the Hegelian dialectic into a powerful tool of analysis. Two centuries later, this scientific method enables us to see beyond the surface of events, eliminate what is secondary and transient, and lay bare the fundamental processes. Only the Marxists, standing on the basis of dialectical materialism, can look forward to the future with real optimism.

London, 12 January, 2011