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The eurozone’s Greek crisis (2.0)
The severe economic crisis in Greece is deepening – along with Ireland and Portugal, not to mention Spain. Divisions between EU politicians are widening. If the much discussed possibility of a Greek default is realised, it would shake the entire eurozone, and trigger further global financial turmoil. Over two articles, LYNN WALSH assesses the situation.
GREECE IS TEETERING on the edge of a default on its government (‘sovereign’) debt, most of which is owed to European banks and financial institutions. Eurozone leaders are desperately trying to find a way of preventing a default, which would have a devastating effect on the European and world economies. A default by Greece – in effect, bankruptcy under which the Greek government would not be able to pay its debts – would trigger a new banking crisis, probably as severe as 2008. At the same time, a Greek default could trigger the breakup of the eurozone, with the emergence of two or more currency areas, if not a complete disintegration.
Greece, moreover, is far from being an isolated case. Ireland and Portugal have only avoided bankruptcy through massive eurozone/IMF loans on condition of devastating austerity measures. Spain, a much bigger economy, faces similar problems. The massive demonstrations before the municipal elections – against 40% youth unemployment and savage government cuts – are a further indication of the deep revolt that is developing throughout Europe against the ravages of finance capital and the bankruptcy of the system.
Since the sovereign debt crisis erupted early last year, eurozone leaders have scrambled to improvise stop-gap measures. They appear to be acting on the basis that countries like Greece, Ireland and Portugal are facing a temporary liquidity crisis, an inability to finance their debts because of the recession. The eurozone leaders refuse to accept (at least publicly) that these countries face a solvency crisis: they are effectively bankrupt. They have no strategy for dealing effectively with this crisis. At the same time, the rating agencies which act for big investors, like Moody’s and S&P, have downgraded Greek bonds to ‘junk’ status. The big banks are demanding that eurozone governments step in to guarantee the debts of Greece and other floundering states, effectively transferring the massive potential losses from private banks to official agencies and governments.
Whichever policy is followed by the eurozone capitalists, the working class faces a prospect of savage austerity. New loans will only be granted to the Greek government on the basis of even more drastic austerity measures. The Financial Times made this clear in an editorial (9 May): "Greece must do more to salvage its solvency. Athens last year enacted tax increases and spending cuts amounting to 8% of gross domestic output, cutting the deficit from 15.4 to 10.5% of GDP in a single year and pushing the economy to its knees. This tightening is extraordinary. It is also not enough". The editorial was under the headline: ‘Athens must be put under the gun’!
On the other hand, some commentators now see a Greek default as inevitable, including Financial Times columnist, Samuel Brittan: "A severe debt write-off by Greece and Portugal is a forgone conclusion; and in my view both countries would be better off without the euro". (12 May) However, a default and exit from the eurozone would also lead, on a capitalist basis, to a further degradation of living standards.
The colossal cost of bailouts
THE GREEK BAILOUT implemented last year has not worked. The Greek government was granted €110 billion of loans on condition that it carried out drastic attacks on the working class: welfare spending cuts, wage cuts, pension cuts, and increased taxes. However, it is estimated that Greece will require around €50 to €80 billion of new loans in 2012 to cover its borrowing needs. There is no way that Greece will be able to raise this on international financial markets. The main reason Greece has not met its economic targets is that the austerity measures have prolonged the economic slump.
Without sustained growth, there is no way Greece will be able to reduce its indebtedness. The Greek economy contracted by -4.4% last year and is expected to contract by -3.5% this year. In reality, the ‘rescue’ by the International Monetary Fund (IMF), European Central Bank (ECB) and eurozone has only increased the indebtedness of Greek capitalism and undermined its ability to pay off its debts. Greece is currently forced to pay around 14% interest on its ten-year bonds, while Germany pays only around 3%. This shows that bond investors are already pricing in the risk of a substantial default.
Eurozone leaders are discussing a further €30 billion loan to Greece, but only on condition that the government rapidly carries out a further €50 billion of privatisation of state industries and utilities. It has even been proposed that the privatisations should actually be supervised by the IMF, which would mean a complete loss of economic sovereignty for Greece. Another proposal is that the revenue from privatisation should be handed over to the IMF and European Financial Stability Fund (EFSF) as collateral for new loans. This is reminiscent of 1923, when French forces occupied the Ruhr to seize coal after Germany fell behind with reparation payments imposed after the first world war.
Capitalist leaders are deeply divided. The ECB, German government and others favour more loans to Greece, on condition of further austerity measures and privatisation. Apart from its impact on the euro, a default would force eurozone governments to bail out the banks taking the losses. Leaders like Angela Merkel in Germany fear an electoral backlash against further bailouts. There is fear of the eurozone becoming a so-called ‘transfer union’ in which the stronger economies are effectively financing the weak economies.
This position was spelled out by Otmar Issing, former chief economist of the ECB: "The present seemingly unstoppable process towards further financial transfers will generate tensions of an economic and especially political kind. The longer this process is characterised by unsound conduct of individual member countries, the more these tensions will endanger the existence of EMU [economic and monetary union]". (Financial Times, 11 January)
Praying for an orderly default
OTHER SECTIONS OF the capitalists, particularly in the finance sector, now believe that a default is inevitable. They recognise there is a limit to the austerity that can be imposed on the Greek people without provoking greater social conflict and uprisings. Last year, for instance, Hans-Werner Sinn, head of the German IFO Institute, warned a policy forum: "The policy of forced ‘internal devaluation’, deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30% without major riots… Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks". (Daily Telegraph, 3 September 2010)
It would be better, in the view of many financial strategists, to carry out an orderly default. This would involve the exchange of existing Greek government bonds for new bonds, guaranteed by the IMF/ECB, etc, that modified their terms. This could mean longer periods of repayment and possibly a lower interest rate. This ‘haircut’ for the bondholders would be regarded as a ‘soft’ restructuring, or ‘re-profiling’ of bonds.
But the most contentious issue is whether there should be a reduction in the face value of the bonds, which would hit bondholders much harder. Many commentators now regard this as unavoidable. A soft re-profiling, they argue, would not sufficiently relieve the debt burden of countries like Greece, which would require yet another bailout package – or default. To be effective, a reduction of the face value of bonds would have to be at least 50% - a serious default for Greece’s creditors.
Greek government bonds are already trading on the secondary bond market at about 60 cents in the euro, effectively a 40% devaluation of the debt. However, an official reduction of the face value of sovereign bonds would be regarded as a ‘credit event’. This would require financial traders to mark down the value of the bonds on their books, and would trigger claims on credit default swaps (CDSs, used to insure bonds and other securities from losses). As with the crisis with Lehmans and the American International Group in 2008, this could trigger massive losses for big investment banks trading in CDSs.
The main motive of these finance capitalists is to secure an effective rescue of the banks. Overall, foreign banks, mainly in northern Europe, have loaned $2.5 trillion to the four heavily indebted eurozone countries, Greece, Ireland, Portugal and Spain. There are $170 billion bank loans to Greece. Domestic banks also hold billions of euros of government bonds. A forced default, or a panic-driven rescheduling, could trigger a banking crisis on the scale of 2008. There would be huge losses for the banks, not only on government bonds but also on the various ‘derivatives’ linked to the bonds.
There is certainly the potential for Greece – or Ireland or Portugal – to become another ‘Lehmans’. Even if the EU leaders were able to agree on a course of action, there is no guarantee that they will be able to carry through an ‘orderly’ rescheduling. Such is the volatility of financial markets, the leaders’ efforts may be overtaken by events, with the unfolding of an uncontrolled, chaotic debt crisis.
The euro under threat
AT THE MOMENT, the Greek government is clinging to the euro (despite rumours early in May that it was considering withdrawal from the eurozone). It calculates that if it is part of the eurozone then the stronger eurozone governments will be forced to bail out the Greek economy.
However, at a certain point the conditions of such a bailout will become unsustainable. Writing in the Daily Telegraph, Ambrose Evans-Pritchard points to a downward spiral: "An ominous pattern has emerged across much of the eurozone periphery: tax revenue keeps falling short of what was hoped. Austerity measures are eating deeper into the economy than expected, forcing further fiscal cuts". (1 November 2010) This process will actually increase the indebtedness of the already bankrupt countries.
The conditions attached to new loans would make them intolerable, making withdrawal from the eurozone preferable. Then, countries like Greece and most likely Ireland and Portugal (and possibly Spain) would at least have the option of devaluing their new national currencies and boosting exports, as well as encouraging inflation which would reduce the real (inflation-adjusted) value of their debts. In any case, they would almost certainly re-denominate their foreign-held debt in their new national currencies (thus reducing its value in euro terms), which would mean devastating losses for the bond-holding banks.
The euro may or may not survive this crisis. Its short-term fate depends on the direction of the world economy (a new recession could prove fatal for the euro) and the strength of the working-class movement against the austerity measures being imposed to ‘save the euro’ – and the big banks which financed the debt-driven bubbles that have now collapsed.
But, in the next few years, the eurozone will be wrecked on the rocks of insurmountable economic problems and the conflict of national interests between the member states. Until the present crisis, ‘exit’ from the eurozone was considered unthinkable. An EU working paper even declared that unilateral withdrawal by a eurozone member would be illegal under international treaties, though they accepted that, in practice, the major EU powers could do little about it. Today, the prospects of a eurozone breakup are being openly discussed by financial strategists and media commentators – and no doubt are being intensely discussed behind the scenes by EU leaders.
HORRENDOUS AUSTERITY measures have provoked massive resistance from the working class throughout Europe, especially in the countries facing the most acute debt crisis. Workers are furious that they are being forced to pay for a crisis triggered by the banks and other predatory speculators. The real bailout is the rescue of the banks and big business by the working class.
In Greece there have been nine general strikes and seemingly endless protests against cuts. There has been resistance in Ireland, Portugal and Spain. Commentators, however, have noted that there appears to be a lull in the strikes and protest action, a certain ‘protest fatigue’. Any such pause, however, will be purely temporary. It arises because the leaders of the workers’ organisations, while calling strikes under pressure from below, have no alternative to the policy of bailouts and austerity measures.
Faced with this deep, long-term crisis of capitalism, the working class needs a bold alternative. This should be based on a clear refusal to pay the debts run up by capitalist governments, from which banks and other speculators hugely profited when the going was good. Repudiation of debts, however, is not in itself a solution. On the basis of capitalism, bankruptcy of the state would mean a period of prolonged poverty and suffering for the working class.
Control of the banks and the commanding heights of the economy – the major industrial and commercial companies – must be taken out of the hands of the capitalist class, which is responsible for the present global crisis. The economy should be planned and managed in the interests of working people, controlled by elected representatives of workers, trade unions, consumers, community organisations, and so on. This would be the beginnings of a socialist planned economy, which would have to be developed on an all-European and international scale.
Struggling to save the eurozone
BEFORE THE GLOBAL crisis that began in 2007, the eurozone leaders, particularly the leaders of the Franco-German alliance that dominate the project, trumpeted the success of the euro. The common currency, together with the European Union-wide single market, undoubtedly helped to increase intra-EU trade. However, there was no acceleration of the growth rate of the eurozone, which was no better than the overall EU growth rate. Inflation was low, but this was mainly due to international factors – global over-capacity and intense competition among low-cost producers – rather than the policy of the European Central Bank (ECB).
The common, multi-national currency did not facilitate increased political and institutional integration between the national states sharing the euro. Even with banking, there was increased integration of investment banking (including London-based banks outside the eurozone), but there was no comparable integration of high-street, retail banking. There was no harmonisation of legal systems and financial regulatory structures. Claims that a common currency would lead to greater ‘convergence’ and steps towards a political confederation were not borne out.
The ECB set a common interest rate and regulated the money supply. It pumped credit into the European economy during the credit crunch which gripped the world economy in 2008, resorting to quantitative easing, like the US Federal Reserve and the Bank of England. However, national governments within the eurozone continued to issue their own bonds to finance their budget deficits. This complication (in contrast to the US with its vast fund of federal Treasury bonds) limited the development of the euro as an international reserve currency.
The weaker eurozone economies with trade deficits, like Greece and Portugal, may have been adversely affected by the strengthening of the euro against the US dollar and other major currencies (making it hard for them to increase their exports). This trend reflected the strength of the major eurozone economies with big trade surpluses, like Germany and Netherlands. Instead of the convergence envisaged by the 1992 Maastricht treaty, there was a widening of the gap between surplus and deficit countries within the eurozone.
The weaker, ‘peripheral’ countries took advantage of low eurozone interest rates. Governments and banks could borrow money from the ECB (using government bonds as security) almost as cheaply as the stronger countries with budget and trade surpluses. Cheap euro credit fuelled property booms (especially in Ireland, Greece and Spain), bank-lending bubbles (particularly in Ireland), and public-spending booms (notably in Greece and Portugal). As a result, the ECB holds billions of euros worth of dodgy government bonds. At the same time, foreign banks have outstanding loans of $1.7 trillion to banks in Greece, Ireland, Portugal and Spain. There are also $756 billion of derivatives linked to these loans. This exposure to potential bad loans does not include the bond holdings or loans of domestic banks within these four countries.
This situation arises from the contradiction in the Maastricht project. The treaty established a monetary union without a political union. No doubt some EU leaders believed that a common currency would prepare the way for piecemeal progress towards political integration. But despite a limited surrender of economic sovereignty, both the EU and the eurozone remained associations of nation states which refused to surrender their fundamental sovereign powers. Thus the euro was launched in 1999 without a eurozone finance authority that could impose fiscal policy on the countries sharing the euro or in any way curb the credit-driven property bubbles that developed.
The EU’s muddled response
THE EUROZONE WAS inevitably hit by the global financial and economic crisis that started with the US subprime crisis in 2007. The downturn exposed the extent of the sovereign debt crisis facing the eurozone, with a potentially explosive situation for the banks that had financed the spending spree. The emergence of the sovereign debt issue in 2010 was a factor in stalling the very feeble ‘recovery’ in the world economy.
It was clear from the start that eurozone governments had no mechanism for dealing with the crisis. Maastricht ruled out bailouts. EU leaders were in complete disarray, fearing a nationalistic electoral backlash against bailing out ‘profligate’ foreigners. EU leaders held a series of inconclusive meetings in the early part of 2010, while financial markets were in turmoil. They promised that the EU would support Greece, Ireland and Portugal and not allow defaults, but were slow in coming up with concrete measures. The suggestion by German chancellor, Angela Merkel, that bondholders should be forced to take a "haircut" (that is, accept losses on the bonds they held) caused a furore among finance capitalists, and EU leaders were forced to announce that there were no immediate proposals for such write-downs (which would have amounted to a partial default).
In an admission of weakness, eurozone leaders were forced to rely on the IMF as a kind of surrogate treasury to sponsor a bailout. Through a hastily improvised European Financial Stability Fund (EFSF), on 9 May 2010 they came up with an aid package of €750 billion (€500bn from the eurozone countries and €250bn from the IMF). The EFSF will issue bonds to finance the loans. This rescue is hardly a model of collective action. To avoid accusations that it is effectively organising bailouts, it has been structured as a package of bilateral loans, with each contributor (including the loan recipients) being liable for their share of the fund (proportionate to GDP)! The EFSF has provided massive loans to Ireland and Greece, and more recently Portugal, on the basis of savage austerity measures.
The EFSF will be supplemented from 2013 by a new body, the European Financial Stabilisation Mechanism (EFSM). This body will be able to provide emergency funding to any EU state on the basis of loans guaranteed by all 27 EU members. However, so far it is authorised to raise only €60 billion (compared with the €440bn for the EFSF), which is likely to be a drop in the bucket as further financial crises unfold. At the same time, the European Commission (EC) is pushing proposals to strengthen its surveillance of the fiscal performance and economic policies of member states.
IN AN OUTBURST last year, Merkel even demanded that countries that break EU budget discipline should be liable to expulsion from the eurozone. (EurActiv, 18 March 2010) Yet during the global economic downturn in 2008-09, all the major EU powers, including Germany, broke the stability pact guidelines on budget deficits and national debt. In reality, the EU has no power to enforce economic policy without unanimous agreement of all 27 members, which is unachievable in practice. Unilateral action by Germany to employ some kind of sanctions against ‘delinquent’ countries, however, would threaten the very existence of the eurozone.
The Eurogroup, economics and finance ministers of the 17 eurozone countries, meets monthly, but they are informal meetings. There is no decision-making body responsible for steering the eurozone’s economic policy. Once again, it highlights the contradiction between a common currency and the lack of an economic power. This is particularly true given the increased interdependence of financial markets, when problems in one state rapidly spill over into the others. Last year, José Manuel Barroso, EC president, stated: "Let’s be clear, you can’t have a monetary union without having an economic union. Member states should have the courage to say whether they want an economic union or not. And if they don’t, it’s better to forget monetary union all together". (EurActiv, 12 May 2010)
Some capitalist leaders are still dreaming of the further integration of the EU into a confederal structure. For instance, Felipe Gonzáles, former right-wing Socialist prime minister of Spain, argues that the only way for the EU to emerge from the financial crisis is to "move forward decisively on the path towards ‘federalisation’ of economic and fiscal policies". He even advocates the federalisation of foreign and security policy. (New York Times, 7 January 2011)
But this is utopian. Even in a period of economic upswing, the EU leaders were unable to centralise EU institutions with real power, even in the economic sphere, let alone foreign policy and military forces. Enlargement to 27 members has made further integration even more problematic. The kind of changes envisaged by Barroso, for instance, would require treaty changes which, in turn, would require referenda in a number of states.
GIVEN THE STRENGTHENING of nationalist feeling throughout Europe, together with the appearance of xenophobic trends (for instance, the so-called True Finns, Danish People’s Party and Sweden Democrats, and renewed support for the Front National in France and Northern League in Italy), who believes that pro-Europe leaders could secure majorities for the further surrender of national sovereignty to a more integrated, federal Europe?
The obstacles in the way of federal schemes reflect more than passing political difficulties. Despite the tremendous growth of the world market, with the interdependence of trade and finance, the capitalist system is still anchored in the national-territorial state. While capitalists operate far beyond their national borders, the wealth and power of each capitalist class is rooted within its frontiers, based on its property and defended by its state apparatus.
Moreover, capitalism has for centuries fostered national consciousness to legitimise and reinforce its rule, and that national consciousness cannot simply be brushed aside because sections of capitalist leaders now favour pooling some of the power with European partners. On the contrary, the organic crisis of capitalism, with deepening social tensions, is strengthening reactionary nationalist and xenophobic forces which make it even more difficult for capitalist leaders to strengthen the EU’s embryonic federal features.
With the tremendous growth of the advanced capitalist economies in the post-war period, the productive forces of Europe objectively required greater integration, especially if west European capitalism was going to hold its own against US imperialism. Sections of European capitalism recognised this and, beginning with the European Coal and Steel Community and the Common Market, developed the EU and the euro. But they could only use capitalist methods and, while they could reach over the national frontiers, they could never dissolve them.
From the beginning, we rejected the idea (accepted by some on the Marxist left) that the EU would step by step lead to a federal European state, or even a looser confederation. We did not accept that sections of the national capitalists could develop into a unified, transnational euro-capitalist class. We predicted that, while it could go forward during periods of economic upswing, the EU would face growing internal tensions in times of crisis. We also rejected the idea that the euro, launched in 1999, would become a permanent currency union, embracing more and more European states. We predicted that, in the event of deep economic crisis, the eurozone would inevitably be thrown into crisis – and at some point break up into two or more currency areas or disintegrate entirely.
No capitalist solution
THE PRESENT CRISIS confirms our prognosis. Far from cushioning the eurozone countries from the global crisis, the common currency has exacerbated the situation. The eurozone system allowed the weaker economies, like Greece, Ireland and Portugal, to run up huge current account deficits and unsustainable levels of debt. The more powerful states are forced to intervene to try prevent defaults, which would throw the whole eurozone into an even deeper crisis and threaten the survival of the bond-holding banks throughout Europe. Whether key economic powers manage to save the euro this time remains to be seen. But the euro can only survive on the basis of transferring a huge share of the existing debts from the private banks to public authorities, like the EU and IMF (ultimately piling the cost of the bailout onto the working people of Europe).
A ‘solution’ to the current euro crisis will weigh like a crippling burden on the European economy, sapping the reserves available for another round of bailouts. If it survives this round, it is unlikely to survive the next time. One or more of the weaker economies may break with the euro – or be pushed out – at least being able to take advantage of a devaluation of a new national currency to stimulate growth through exports. Alternatively, Germany, together with its main trading partners (Netherlands, Denmark, Belgium, Luxembourg), might initiate a rupture, abandoning the euro to form a new Deutschmark bloc.
We do not oppose the EU or the euro from a narrow, nationalist standpoint. The unification of the whole of Europe would be an enormous step forward. But this cannot be achieved on a capitalist basis. The existing EU institutions, like the EC, the ECB and so on, are clearly agencies of the capitalist ruling class, incapable of surmounting capitalist limitations. The European parliament has very limited oversight over the EC and no control at all over the national states that, through the Council of Ministers, take all the key decisions.
We stand for the unification of Europe on a socialist basis. This would take the form of a voluntary socialist confederation of states, based on a planned economy and workers’ democracy. Economic growth would provide the basis for real ‘convergence’ through levelling up living standards, in contrast to the current neo-liberal ‘race to the bottom’. The integration of finance and trade into a common plan would allow the development of a durable common currency. The ‘social Europe’ falsely promised by EU leaders in the past could be achieved, with the generous provision of public education, health and welfare services. Instead of being locked into a crisis-ridden ‘fortress Europe’, the workers of the continent would reach out to collaborate with the workers of the world.