In a scene reminiscent of the attempt to save the world by science fiction superhero Flash Gordon, the leaders of the European Union have given themselves a two-week deadline to resolve the eurozone crisis. While in the fantasy world Flash Gordon saved the world, in the real present-day crisis-ridden world the EU leaders are staring failure in the face, with all the consequences that this will mean in terms of growing political instability and, more importantly, of growing class struggle.
“Europe’s monetary union is at the centre of a financial hurricane now closer than ever to tearing through the world economy and inflicting damage for years to come”, states the editorial in the Financial Times (10/10/11). They desperately look to resolve the crisis which “will require hard labour for years.”
The so-called Grand Bargain, which will include another final decision on the Greek bail-out and a strategy to recapitalize the European banking system, can only be seen as a desperate gamble ahead of the G20 summit in November. The sovereign debt crisis has been rumbling along for two years, but there is still no end in sight.
Pressure is being exerted by the Americans for the EU leaders to act and prevent a meltdown as the European debt crisis spins out of control. They realize that failure to stop the contagion risks plunging the global economy into further turmoil. Tim Geithner, the US Treasury secretary, warned of “cascading default, bank runs and catastrophic risk” if a firewall is not created.
Greek debt remains the immediate contention. Creditor nations, starting with Germany, are pushing to revise the second £95bn bail-out, with deeper “haircuts” for Greek bondholders – but resisted by the French and others concerned that these measures would spread panic throughout the financial system. However, the bomb is ticking.
“For more than four years now, we have been experiencing turbulent waters, storms, unexpected hurricanes”, complained Jean-Claude Trichet, the retiring head of the European Central Bank.
Worries over the health of European banks have led to a tightening of inter-bank lending. The crisis has forced the Belgian government to nationalize the domestic operations of Dexia, a financial institution, with state guarantees worth €90billion (US$20billion) to finance the rest of the group. Dexia was on the verge of bankruptcy, despite passing the European stress test, which only serves to prove that those tests were not worth the paper they were written on. Another financial group, Austria’s Erste, also announced it had fallen victim to the crisis and would lose as much as 800 million euros this year.
The measures being pursued by the EU leaders are like placing sticking plasters over a gaping wound. Sooner or later, Greece is going to default as it cannot afford to pay its debts. The very austerity being implemented is cutting the market and pushing the economy deeper into crisis. Loans from the EU or IMF can only serve to delay the default, whatever the haircut given to holders of Greek debt. A Greek default would mean that the European Central Bank would not be able to accept government bonds as collateral and would lead to the collapse of the Greek banking system.
When Greece defaults it will have a massive impact on those banks and institutions holding Greek debt, especially French but also German banks. Ireland will also be affected which will bring down the British banks. This reflects the decision of Moody’s to downgrade some UK lenders. And any recession in Europe would damage British exports, 40% of which go to the eurozone. In reality, the crisis has already spread to Spain and Italy, and will spread further.
The EU leaders are squabbling over the size and role of the European Finance and Stability Facility (EFSF) – the rescue fund. Even then, its implementation must be approved by all 17 countries using the euro, but Slovakia is holding out. It may prove to be the fly in the ointment. Some have proposed, starting with Tim Geithner, to “leverage” the EFSF to increase its firepower. But this means turning it into a Collateralised Debt Obligation (CDO), the very thing that intensified the last crisis! They would have all the features of a highly leveraged security which proved so toxic. Desperate people find it very hard to learn!
The impending financial crisis could not have come at a worse time for world capitalism. Everything is being turned on its head. Interest rates on US, German and UK government bonds have fallen to an all-time low. Returns on 10-year US Treasuries are below 2%, the lowest ever recorded. While returns on inflation-protected 10-year Treasuries are zero. “These are almost incomprehensible levels, whose implications are profoundly negative”, writes Roger Altman, former US deputy Treasurer under Clinton. “Only the anticipation of negligible demand for capital and negligible inflation – could drive rates so low.”
This bleak outlook is correct. The IMF’s recent report states bluntly that Europe and America are on the verge of recession. “For the American and western European economies to decline again, when unemployment levels are already so high, would be disastrous”, states Altman. “Overall we are in serious danger of repeating the experiences of 1937, when America fell back into recession after three years of recovery from the Great Depression. Sadly, there is no other credible explanation for the relentless fall in interest rates.”
He continues, “Recent US and European economic data confirm this serious weakness. US household net worth has begun to fall again, while jobless claims have been rising for several weeks. Retail sales are flat and consumer confidence is hovering around modern lows. Onshore corporate liquidity has reached a record $3,000bn, signalling business uncertainty over the outlook.
“Across the Atlantic, the trend is just as bad. Neither Germany nor France grew in the second quarter. Household consumption in the eurozone actually fell during that period. Moreover, the European Commission forecasts only 0.2% and 0.1% growth across the region for the third and fourth quarter respectively. The worsening sovereign debt crisis surely means actual results will be worse.”
He concludes, “the risk of another Lehman-like collapse and subsequent economic contraction is now extremely significant.” (FT, 22/9/11)
This reflects the deep crisis of capitalism at the present time. The four-year crisis, beginning as a financial crisis, then a crisis of overproduction, has transformed into an unsustainable debt crisis of households, banks and governments. They cannot grow out of the debts, as they are busy cutting the deficits and cutting the market. This simply causes a spiral downwards. Larry Summers summed up the contradiction. “It is the central irony of the financial crisis – caused by too much confidence, borrowing and lending and spending – that it cannot be resolved without more confidence, more borrowing and lending and more spending.”
The point is that capitalism is not a rational system, but one based on the maximisation of profit. There is no plan, but the anarchy of the market. These contradictions have led to the current crisis, the deepest in the history of capitalism. After a slump there is supposed to be a recovery, but there is no recovery, only deepening crisis. These are not normal times. In the past, the apologists of capital said that capitalism had solved its problems. They denied that there could ever again be a slump, especially on the lines of 1929. But events have proved them wrong.
As Marx explained, capitalism is a crisis-prone system. It can only go forward by increasing production and increasing demand. But that is no longer possible. They are cutting back production and investment and are cutting demand. The market has completely sagged. Company stockpiles have reached the highest levels since tracking began in 1992. This has driven the capitalist system into a blind alley from which they cannot escape. That explains the panic amongst the representatives of capital. As Sean O’Discoll, chief executive of Glen Dimplex states, “You only invest if there is increased demand. At the moment there is no increased demand, so that curtails investment.”
They understand that there is no quick fix, that we are facing decades of austerity. It is not accidental that Roger Altman has referred to the 1930s and 1937 in particular. We are in a similar position today. The Great Contraction is threatening to turn into another Great Depression. While in the 1930s, the crisis in the final analysis was “solved” by the Second World War and war production, such a “solution” today would be ruled out, at least in the coming historical period. World war would destroy the working class and the capitalist system itself. Therefore, today’s contradictions will not be resolved but will become internalised, piling up and manifesting themselves in increased class struggle. As we have explained many times before, all the attempts to restore economic equilibrium will destabilize the social and political equilibrium.
In reality, the capitalist system has reached its limits. The productive forces of industry, technique and science have outgrown private ownership of the means of production and the nation state. From a relative fetter, these have now become an absolute fetter on development. As Marx explained in the Communist Manifesto:
“A similar movement is going on before our own eyes. Modern bourgeois society … has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production.
“Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.”
Years of austerity will propel the working class into action to defend its conditions. Through experience it will come to the conclusion that on the road of capitalism there is only a nightmare for the working class. They will come to realize that only by overthrowing capitalism can we solve the problems. In this process, the ideas of Marxism will play an indispensable role.