|
![Socialism Today 160 - July/August 2012](../furniture/issue160.gif)
Riding
the double-dipper
Capitalist leaders are in disarray as they strive
and fail to get to grips with the eurozone crisis and its threat to the
global economy. Neither the G20 summit in Mexico, nor crisis talks in
Rome offered any solutions, as politicians and economists desperately
try to hang on to the eurozone roller-coaster. LYNN WALSH reports.
O NCE
AGAIN, THE eurozone crisis dominated the G20 meeting of world capitalist
leaders (Los Cabos, Mexico, 18-19 June). Yet again, the meeting
concluded with a bland communiqué with no concrete measures to tackle
either the eurozone crisis or the deepening global crisis. Barack Obama,
facing presidential elections in November, desperately called on the
eurozone leaders to resolve the debt crisis and temper austerity
measures with ‘growth policies’. European leaders, on the other hand,
noted that Obama has not been able to promote a further stimulus package
in the US because of Republican opposition in the Congress. Moreover,
they warned that the US’s own debt burden, with the threat of colossal
spending cuts in 2013, could push the US – and the world economy – over
the edge of the abyss.
Only three of the G7 countries
(Canada, the US and Germany) have got back to their pre-crisis peak of
production (see table below). Now US growth is petering out, while there
is either stagnation or recession in the eurozone (with Germany now
sliding into recession). In 2007-08, the housing mortgage crisis
triggered a worldwide banking and financial crisis. Now the sovereign
debt crisis holds both European governments and the major banks in the
thrall of financial turmoil. Greece and Spain in particular are like
time-bombs which could detonate a major explosion at any time.
![](../images/160Economychart.jpg)
Source: Floyd
Norris, Cheer Up US, It Could Be Worse, International Herald Tribune, 16
June 2012
The Rome meeting (22 June) of the
leaders of the eurozone’s big four economies (Germany, France, Italy and
Spain) demonstrated that the eurozone crisis is no nearer to resolution.
They announced a €130 billion ‘growth package’, but with very limited
new money. They remained divided on the most acute issue, the continuing
credit crisis.
Mario Monti, François Hollande and
Mariano Rajoy called for the use of the eurozone’s bail-out funds to
"stabilise financial markets". They want to authorise the European
Financial Stability Facility (EFSF), and later the European Stability
Mechanism (ESM) to intervene directly to support shaky banks. They also
propose that the rescue funds should be able to buy the debt of
‘virtuous’ countries to support their bonds (presumably ‘virtuous’ means
any eurozone country except Greece). Angela Merkel, however, opposed
these proposals, once again highlighting the contradiction within the
eurozone between a common currency and the national interests of member
states.
"There was an agreement among all of
us", claimed Spain’s prime minister, Rajoy, "to use any necessary
mechanism to obtain financial stability in the eurozone". Responding to
Merkel’s call for accelerated steps towards a fiscal union, Hollande
said there could be "no transfer of sovereignty without an improvement
in solidarity", continuing to advocate the need for mutualisation of
eurozone debt, through eurobonds or some other mechanism. Solidarity,
responded Merkel, was possible only with serious controls and collective
oversight: "You cannot have guarantees without control".
"It’s not that I do not want to
provide help, but the treaties are set up in such a way that the
governments are the partners", Merkel said. In other words, the eurozone
(or the European Union for that matter) is an inter-governmental
organisation, not a federal state. Moreover, Germany has to finance
around 30% of any eurozone intervention, and has so far contributed
approximately €300 billion to the various bailouts. "Germany’s strength
is not infinite, its powers are not unlimited", protested Merkel in
Rome.
At the G20 meeting in Mexico, Obama
and Christine Lagarde, head of the International Monetary Fund (IMF),
were calling on the eurozone leaders to take urgent action to resolve
the crisis, which is increasingly becoming a drag on the world economy.
But even the terms of the bailout of the Spanish banks have not yet been
fully resolved. It was agreed for the eurozone to provide up to €100
billion to stabilise the Spanish banks. But there is no agreement on the
procedure. Rajoy, Hollande and Monti are calling for the funds to go
directly to the banks so they do not add to Spain’s sovereign debt
(which would further undermine the country’s credit rating).
Merkel, however, is insisting that
the bail-out funds are channelled through the Spanish government. This
explains why Spain’s borrowing costs remain well over 6% and have gone
over 7% a number of times (compared, for instance, with 1.45% for
France). Moreover, some eurozone leaders are insisting that the loans to
Spain from the EFSF or the ESM will have ‘seniority’. In other words, in
the event of default they will have priority as far as repayment is
concerned. This leads investors in the bond market to regard Spanish
debt as even more of a risk, as they are demoted when it comes to credit
or repayment in the event of default.
Like the low-cost, long-term credit
recently provided to European banks by the European Central Bank (ECB),
bail-out funds for the Spanish banks are likely to have a very limited,
short-lived effect on the crisis.
![Socialism Today 160 - July/August 2012](../images/160cover.jpg)
Up until quite recently, the ECB was
actively intervening to soften the eurozone credit crunch. It was buying
eurozone government bonds, which tended to keep borrowing costs lower
than they would otherwise be. Since June 2010, when the ECB started this
‘securities market programme’, the bank has bought €210.5 billion of
bonds. However, in recent weeks the bank stopped the SMP programme,
despite the fact that Spain’s bonds yields soared.
The ECB also launched the
Longer-Term Refinancing Operations (LTROs), allowing eurozone banks to
borrow huge amounts from the ECB at low interest rates (and on the basis
of a wide range of collateral). Among other things, this allowed banks
to buy government bonds, a backdoor way of the ECB supporting eurozone
governments. Early in June, however, the ECB changed its policy,
refusing to buy any more government bonds. ECB officials indicated that
they now regarded as the task of the EFSF and the ESM to buy eurozone
government bonds.
The ECB’s change of policy reflects,
among other things, the pressure of the German government and others who
oppose providing unlimited credit to debtor countries (as creditor
countries like Germany would have to pick up the bill).
The impasse of the eurozone is shown
by the ESM, which is still not up and running. In effect, Hollande,
Monti and others are proposing that (as the ECB does not act as a ‘bank
of last resort’, backing the debts of major governments) the ESM would
act as a bank, with powers to directly support floundering banks or
provide additional bail-out funds to eurozone governments. Merkel
opposes this. Moreover, the ESM has yet to be approved by the German
parliament, and this may be delayed for some time by a challenge to its
constitutional legality in the German constitutional court.
Merkel’s position reflects that of a
section of the German capitalists, who are increasingly resentful at
being called on to bail out the weaker economies (despite the advantages
that Germany gained from being within the eurozone). Recent opinion
polls show that 55% of German voters wish that Germany had kept the
Deutschmark. This opposition to the eurozone will grow in the coming
months.
In an editorial (22 June) the
Financial Times warned: "Clock ticking for the euro’s leaders". Among
other gloomy things for European capitalists, they point to the Greek
time-bomb: "Financial markets" (that is, big financial speculators)
"took scant relief in the victory of one Greek party [New Democracy]
that wants to renegotiate the country’s rescue deal over another [Syriza]
that wants to reject it outright".
The new prime minister, Antonis
Samaras, leader of New Democracy, is now demanding that the
implementation of austerity measures already agreed in return for two
bail-out packages should be postponed for two years. It is estimated
that this would require a further €20 billion in bail-out funds. On
this, as on everything else, the eurozone leaders are divided. Hollande
and others are in favour of giving Greece more time, while Merkel and
others are opposed to any relaxation of the austerity measures. In
reality, the only issue is timing: the debts piled on to Greece
supposedly to provide a way out of its debt crisis, are unsustainable.
Despite New Democracy’s narrow victory, there will be further explosive
movements of the Greek working class and middle class against the
barbaric austerity measures being imposed on the country.
If the big four cannot reach
agreement on crucial issues, there is no chance of the European Council
coming up with solutions. The election of Hollande in France has
strengthened the demand for less austerity and greater promotion of
growth, still implacably opposed by Merkel and her allies. This deadlock
means prolonged stagnation or another downturn, which in turn means
continuous political and economic crisis. Capitalist leaders fear the
breakup of the eurozone, which would have incalculable repercussions in
Europe and throughout the world economy. But the contradictory forces
bottled up in the eurozone are working in the direction of partial
breakup, if not total breakup somewhere down the line.
Gloomy global prospects
THE OUTLOOK FOR global capitalism is
indeed gloomy. Since April/May this year there have been growing
indications of a new downturn in the world economy. There are a number
of overlapping and interrelated elements of crisis:
The burden of debt:
The high level of public and private debt and attempts to reduce
debt (‘deleveraging’) is restricting the flow of credit and depressing
consumer demand and investment. For the OECD area, government budget
deficits averaged -2.1% during 1999-2008. In 2009 this shot up to -8.1%
and is still currently -5.3%. The aggregate national debt for the OECD
area has continued to increase, and is now 108.6% of GDP. Household debt
(gross debt-to-disposable income) is also very high. For the euro area,
for instance, the pre-boom level in 2000 was 85.3% but is now 107.9%.
Company debt continues to be high. For non-financial companies
(debt-to-GDP ratio) was 78.8% whereas it is now 96.8%. For financial
corporations the debt ratio is even higher: it was 269.1% in 2000 and is
now 381.7%. These figures are unsustainable on the basis of weak or
completely stagnant growth, and carry the threat of increasing defaults
in both the household and company sectors.
Mass unemployment:
Unemployment remains catastrophically high. This is an effect of the
downturn, but reinforces it through weakened consumer demand, reduced
tax revenues, and increased costs of unemployment benefits.
In the EU (27 states) there are 24.6
million unemployed men and women, of whom 17.4 million are in the euro
area (17). This is a jobless rate of 11% in the eurozone, 10% in the EU.
In a number of countries the situation is much worse: in Spain the
unemployment rate is 24.3%, in Greece 21.7%. Youth unemployment for both
these countries is a catastrophic 50%.
Global unemployment is a devastating
indictment of capitalism. According to the ILO there are now 200 million
jobless people internationally (up from 175 million in 2000). There are
75 million young people unemployed, an increase of four million since
2007.
The ILO director general warned (30
May) in coded language of the threat of a social explosion due to mass,
long-term unemployment, especially of the youth. "The austerity-only
course to fiscal consolidation is leading to economic stagnation, job
loss, reduced [social] protection, and huge human costs, undermining
those social values which Europe pioneered. While trying to reduce the
public debt, unsuccessfully by the way, a social debt is building up
that will also have to be paid".
Fiscal austerity:
The policy of ‘fiscal consolidation’, aiming at the short-term
reduction of budget deficits and accumulated national debt through
spending cuts and tax increases – especially taxes like VAT which hit
working-class consumers hardest – is depressing growth, especially in
Europe. "Fiscal austerity responses to deal with rising public debts are
further deterring economic growth, which in turn is making a return to
debt sustainability all the more difficult". (UN Update, World Economic
Situation and Prospects, mid-2012)
The UN economists responsible for
this report take a much more Keynesian view of the situation than most
European leaders: "On the fiscal front, the current policies in
developed economies, especially in Europe, are heading into the wrong
direction, driving the economies further into crisis and increasing the
risk of renewed global downturn. The severe fiscal austerity programmes
implemented in many European countries, combined with mildly
contractionary policies in others such as Germany and France, carry the
risk of creating a vicious downward spiral, with enormous economic and
social costs. Under current conditions, characterised by weak private
sector activity and poor investor and consumer confidence, simultaneous
fiscal retrenchment across Europe has become self-defeating as massive
public expenditure cuts will further push up unemployment, with negative
effects on growth and fiscal revenue".
Bank crisis and continued credit
squeeze: The banking crisis continues,
with a recent sharp fall in bank lending. Following the 2008 financial
sector crisis, the US banks were recapitalised (that is, their capital
reserves were built up) through the government’s TARP programme,
implemented in the dying days of the Bush regime and approved by Obama.
This bailout provoked enormous public anger in the US, but largely
stabilised the US banks. In Europe, on the other hand, the
recapitalisation has been partial and patchy. The ECB has relieved many
banks of a slice of their dodgy government bonds. Yet banks have been
recently using cheap ECB credit (under the LTROs) to buy more risky
government bonds. At the same time, under the new ‘Basel III’ banking
rules, the banks are forced to build up bigger capital reserves than in
the past. They have also become wary of lending either to business or to
other banks, and this has led to a recent tightening of the credit
squeeze.
According to a recent article in the
International Herald Tribune (5 June), worldwide bank lending has
plummeted: "International lending by global banks in the fourth quarter
of last year fell by the largest amount since the collapse of Lehman
Brothers in 2008, according to data released Monday by the Bank for
International Settlements… In total, financial firms cut foreign lending
by $799 billion in the last three months of 2011…" Around 80% of the
reduction came from the so-called interbank market where institutions
lend money to one another. "The pull back in credit, particularly
amongst banks themselves, is the latest effort by financial institutions
to reduce exposure to the global economic slowdown. It also raises
concerns that the unwillingness of banks to lend money to each other may
have an effect on the broader economy, as businesses are unable to
obtain new financing". The Basel III rules are aimed at making banks
more resilient to future financial crisis, but in the short run they are
compounding the immediate problems faced by the financial sector.
Big corporations hoard cash:
While some companies (especially small and medium) are hit by the credit
squeeze, big corporations internationally are hoarding cash rather than
investing it in new productive capacity. In the UK, non-financial
companies are estimated to be holding £731.4 billion of cash reserves.
In the eurozone, cash hoards are estimated at around €2 trillion, while
in the US non-financial companies hold more than $2 trillion in cash and
other liquid assets. The big corporations evidently cannot find
sufficient opportunities for profitable investment. This reflects a
growing trend since the end of the post-war upswing (1950-73). (See:
Corporate Cash Hoarders Stunt Growth, Socialism Today No.158, May
2012) Without investment by the major corporations, there will be no
growth, the current stagnation will continue, and it will become
increasingly difficult to reduce the burden of debt.
![Socialism Today 160 - July/August 2012](../images/160cover.jpg)
The price of oil and geopolitical
risk: The price of oil soared to around
$140 a barrel on the eve of the 2008 financial crash and then plummeted
in 2009-10. However, despite the stagnation of the world economy, the
oil price rose 40% to reach an all-time high average yearly price of
$111 a barrel in 2011, and rose even more in early 2012 (to around
$120p/b). This was due to a combination of continued demand from China,
Brazil, etc, on the one hand, and supply restrictions on the other,
particularly due to sanctions against Iran. Since then, demand has
slackened, and Opec has increased its output. Analysts at Credit Suisse
recently predicted that the oil price could decline to around $50 a
barrel this year. The decline in the oil price has already resulted in a
reduction of inflation. Oil prices also have a big effect on food
prices, because of transport and fertiliser costs, etc. Other commodity
prices have also declined because of weakening demand from China, which
will hit commodity producers like Brazil, Australia, Canada, etc.
However, sanctions against Syria, continued sanctions against Iran, and
the possibility of further upheaval in the Middle East could push up oil
prices again, even during a downturn.
World trade:
After recovering from a steep fall in 2009, world trade appeared to
rebound in 2010. It grew in real terms at an average of 6.7% a year
during 1999-2008, but plummeted to -10.7% in 2009. It recovered to 12.8%
in 2010, but fell to 6% in 2011, and is only expected to grow by around
4% this year. The World Trade Organisation (WTO) and other organisations
are sounding alarms about creeping protectionism. In April, the WTO
reported that since mid-October 2011, the G20 economies had added 124
new restrictive measures affecting about 1% of world imports. (Increase
in Barriers to Trade, New York Times, 22 June) Global Trade Alert, an
independent organisation, reports that "protectionist actions including
tariff increases, export restrictions and skewed regulatory changes were
much higher in 2010 and 2011 than previously thought, with many more in
the pipeline". (Protectionist Fears Highlighted, Financial Times, 14
June) "The world trading system", comments Global Trade Alert, "did not
settle down to low levels of protectionism after the spike in
beggar-thy-neighbour policies in 2009". In a period of economic
stagnation, or downswing, trade restrictions will become more and more
prevalent, reinforcing economic stagnation.
US recovery falters:
The US is one of the few major economies to have surpassed its 2008
peak. The peak-to-trough fall was -5.1% and, at the beginning of this
year, it was +1.2% above the previous peak. However, recovery has been
very weak and uneven, particularly regarding unemployment. After growing
3% in 2010, growth fell to 1.7% in 2011 and is showing signs of petering
out this year. Consumer spending, which accounts for around 70% of the
US economy, has been hit by the enormous losses in household income
suffered by millions of Americans. The Federal Reserve bank recently
reported that "the median family’s net worth dropped 38.8% during the
three-year period [2007-10]… the biggest drop in net worth since the
survey started in 1989". The average American still earns less than six
years ago, even allowing for inflation. (America Suffered Record Decline
in Wealth, Reuters, 11 June)
Recently, manufacturing activity has
slowed down, particularly in capital goods, reflecting the decline in
demand from Europe in particular, one of the US’s major markets. The
weak US recovery, moreover, has been a ‘jobless’ recovery. There are
officially 12.7 million unemployed workers in the US, with eight million
part-time workers who really need full-time jobs. Growth in (non-farm)
jobs averaged 226,000 in the first three months of 2012 but has slowed
to 73,000 in the last two months. The dismal news of only 69,000 jobs
being created in May was taken as a sign of renewed recession – and led
to a dip in world stock exchanges.
China slows:
The Chinese economy remained a locomotive of growth during the
global downturn. Its average GDP growth during 2006-09 was 11.4% and
remained at 10.4% during 2010. This was very largely due to the huge
stimulus package implemented by the regime. It is estimated by Gary
Shilling of Bloomberg that China’s stimulus package was the equivalent
of 12% of GDP (compared with the US stimulus in 2009 of 6% of GDP).
However, in the first quarter of this year, China’s growth fell to
around 8% and is expected to slow even further this year. This partly
reflects a tightening of credit by the regime last year to try to curb
inflation, but it also reflects the beginnings of a sharp decline in the
property bubble, and a decline in exports because of the slowing of the
world economy. A slowdown in China would reduce its demand for
commodities, leading to a general fall in commodity prices (already
underway), which would especially hit commodity exporters such as
Brazil, Australia, Canada, etc.
Chinese government officials admit
that official statistics underestimate the slowdown in output. Figures,
for instance, for electricity demand, which is a proxy for output
growth, indicate an even sharper slowdown. The Chinese regime has
loosened its credit policy and indicated that there will be new stimulus
measures. However, it is doubtful, given the huge debts accumulated on
the basis of the last stimulus package, that it will be on the same
scale as before. Moreover, this downturn coincides with the changeover
in the top party leadership (and follows the Bo Xilai scandal). Reduced
growth carries the threat of more intense political conflict within
China, which could in turn undermine growth even more. This would have a
profound effect on the global economy.
European stagnation/crisis:
The crisis in European capitalism has become a major factor in the
trend towards global downturn this year. The EU countries are likely to
tally zero growth this year, while the eurozone will experience negative
growth (currently predicted by the UN at -0.3% but probably deeper). At
the same time, the threat of a default by a major European country or
the fracturing of the eurozone (for example, through a Greek default)
has had a major effect on global financial markets. The decline in
demand for the exports of major economies like the US and China has had
a depressing effect on global output.
The limits of monetary policy:
In the absence of further stimulus policies (Obama’s proposals have
been blocked by the Republican-dominated Congress) capitalist
governments have relied on monetary policy, with low, near-zero interest
rates and huge injections of credit into the system. This has mainly
been done through the policy of ‘quantitative easing’ (QE), the
contemporary equivalent of printing money, and various other
‘unconventional’ monetary measures.
QE has been described as ‘monetary
morphine’, a drug that eases the pain, becomes addictive, but fails to
cure the underlying sickness. Ultra-expansionary monetary policy has
failed to produce growth, but it has probably prevented the world
economy from slipping into a major slump. However, the policy is subject
to diminishing returns.
The US Federal Reserve led the way
with over $2.6 trillion-worth of QE, through buying US government bonds
and other financial assets (such as securitised mortgages). However, the
Fed has come under increasing attack from Republican ‘inflation hawks’
who believe, contrary to current trends, that QE will lead to
accelerated inflation. This is unlikely in the next period, given
massive overcapacity in the global economy and the weakness of consumer
and investment demand. Ben Bernanke, the head of the Fed, has hesitated
to resort to more QE, preferring to rely on ‘Operation Twist’, the
replacement of short-term US government bonds by long-term bonds, which
is estimated to inject $267 billion into the economy through lowering
interest rates. The continued slowdown of the economy and lower
inflation, however, will almost certainly produce another round of QE in
the US.
The Bank of England has implemented
£325 billion of QE. As in the US, however, the bank has hesitated to
introduce a new round. Instead, it has recently offered a package of
cheap loans to banks (totalling £100bn) on condition they increase their
lending to businesses. No doubt, there will be more QE to come.
The ECB has avoided the term
quantitative easing, but nevertheless has implemented measures that are
very similar: €2 trillion of government bond purchases and cheap loans
to banks (under the LTROs). However, the ECB has recently stopped buying
eurozone government bonds in an effort to force the eurozone leaders to
activate the two rescue funds, the EFSF and the new ESM.
Expanding the money supply has been
described as ‘pushing on a piece of string’. If businesses are not
prepared to invest and consumers have no money to buy, a looser money
supply will not produce growth. This is admitted by Paul Tucker, a
deputy governor of the Bank of England, who recently said: "QE has
miserably failed to generate the sort of growth in broad money that the
bank has said it was targeting back in 2009". The massive expansion of
central banks’ balance sheets has failed to generate the sort of impact
on broad money that could be expected. (Paul Tucker, On Why QE Isn’t
Working, Financial Times, 13 June) Tucker advocates a broader monetary
policy, which would include the Bank of England buying up financial
assets (such as mortgages) that would pump money into businesses and
households.
A period of depression
WITHOUT FULLY RECOVERING from the
2007-09 slump, the world capitalist economy is sliding into a new
downturn. This stagnation is symptomatic of a depression, not as deep or
severe as the 1930s but, nevertheless, a period of weak investment and
growth, mass unemployment and increased tension between capitalist
rivals. The Financial Times columnist, Martin Wolf, describes it as a
"contained depression". (Panic Has Become All Too Rational, 5 June)
"Worse", he writes, "forces for another downswing are building, above
all in the eurozone. Meanwhile policymakers are making huge errors".
By this he means their insistence on
savage austerity measures which stand in the way of recovery. Hollande’s
modest proposals for a Keynesian-type stimulus package have been
described as a ‘faux pas’ by the Financial Times. His suggestion of
higher taxes on big business and the wealthy have been met with howls of
anguish.
Capitalist leaders are in complete
disarray. "What would happen", Wolf asks, "if a country left the
eurozone? Nobody knows. Might even Germany consider exit? Nobody knows.
What is the long-run strategy for exit from the crises? Nobody knows.
Given such uncertainty, panic is, alas, rational... Before now, I had
never really understood how the 1930s could happen. Now I do".
|