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 Eurozone
endgame
After a year and a half, the Greek debt crisis is
far from resolved. In fact, with Greece on the verge of a social
explosion, a default and exit from the euro appears almost inevitable.
The eurozone is threatened by an interlocking sovereign debt and banking
crisis, compounded by near-zero growth. Capitalist leaders are in
complete disarray. Competing national interests are a barrier to
cooperative measures. LYNN WALSH analyses the latest twists and turns of
the eurozone crisis.
ON 21 JULY, the eurozone leaders proclaimed at their
summit that they had agreed on a package to stabilise the Greek debt
crisis. This, they claimed, would avert the threat of a Greek default
and precipitous exit from the euro. There would be a further €109
billion (following the 2010 €110bn package), while the role of the
European Financial Stability Facility (EFSF – with proposed €440bn
funds) would be extended to allow intervention to support governments
and banks. There would, moreover, be a bond exchange that would involve
a 21% ‘haircut’ for the holders of Greek bonds.
This package, however, was more a promise of future
salvation than an immediate, practical solution. The whole deal is
dependent on the approval of the 17 eurozone governments or parliaments,
and this is not likely to happen until the end of September or the
beginning of October. The 20% ‘haircut’ for Greek bonds will provide
very minimal debt relief for the Greek government – Greek government
bonds are already trading at less than 50% of their nominal value on the
secondary bond markets. If the bond exchange goes through (it requires
the agreement of 90% of the bondholders) it will be a good deal for the
banks and a raw deal for the Greek people. In fact, it would require a
‘haircut’ of at least 50-60% to make any real difference to the debt
mountain weighing down the Greek economy.
There is no guarantee whatsoever that all 17
governments will agree on an increase in the funds available to the EFSF
or to increased powers of intervention. The eurozone leaders are
reportedly arguing in tense, behind the scenes negotiations about where
the EFSF funds will come from. Some leaders are proposing that they
would mainly come from the European Central Bank (ECB). This would be,
in effect, another form of ‘quantitative easing’, printing money in
order to bail out governments and banks through the EFSF. This is
strongly opposed both from within the ECB and by a number of
governments, such as Germany and Netherlands, who see it as a road to
escalating inflation. Regarding the €109 billion loans package, the
government of Finland is demanding collateral (security) for its share
of the loan. Other governments, such as Slovakia and Austria, are likely
to make similar demands. These governments are demanding that a slice of
government revenue or physical assets, such as land or buildings, should
be allocated to them as security. This is reminiscent of the demands for
reparations made on Germany after the first world war.
The wrangle over this new package demonstrates once
again the way national interests stand in the way of common agreement.
The 17-strong eurozone is an alliance of national states, not a
confederation with a unified governing body.
Soon after the July summit, moreover, there were
precipitous falls in the shares of major French banks, reflecting fears
about the repercussions of a Greek default. At the same time, European
banks were finding it increasingly difficult to borrow dollars from US
banks to finance their current business. The ECB, which under
Jean-Claude Trichet had been extremely reluctant to intervene, was
forced to step in to offer unlimited dollar loans to eurozone banks. The
ECB also started buying the bonds of the Italian and Spanish governments
in order to prevent a precipitous rise in the borrowing costs of Italy
and Spain.
Meanwhile, growth in all the major eurozone
economies slowed to near zero, indicating a renewal of the recession
that began at the end of 2007. The British economy also slipped into
stagnation. This renewed slowdown is partly the result of fears about a
sovereign debt meltdown and banking crisis, but more especially the
result of austerity measures that have cut demand and reinforced the
spiral of weak demand, falling investment, and rising unemployment. This
in turn reduces government tax revenues, and actually leads to bigger
deficits.
Piling the pressure on Greece
AT THE EUROZONE summit on 17 September, the troika –
the European Council, International Monetary Fund (IMF) and ECB – who
police the austerity measures imposed on Greece, postponed payment of
the latest €8 billion loan due under the 2010 package on the grounds
that Greece has not carried out sufficient cuts in state employment,
spending, etc. Georgios Papandreou, the Greek prime minister, duly
scurried back to Athens in order to carry out the troika’s orders.
The package of additional austerity measures
includes a property tax, together with more public-sector job losses –
on top of the plan to sack around 150,000 civil servants (20% of the
total) by 2014 – and draconian wage cuts. If implemented, the
accumulated measures will mean an economic and social catastrophe. The
troika is "holding a knife to the throat of the Greek government", as
one Greek minister put it, partly to enforce deeper and more rapid cuts
and partly as a warning to other governments like Portugal and Ireland
to keep to their austerity packages. This is a very dangerous game,
however, and could detonate a political explosion in Greece, propelling
the country towards default and exit from the euro.
Economically, there is no way these measures will
provide a way out of the ever deepening slump. In fact, further
austerity measures will only push the Greek economy even deeper into
slump, pushing up the outstanding debt and making it even harder for
Greece to pay it off. After falling 4.5% last year, GDP will fall by at
least 5% this year (second-quarter growth was 7.3% down over last year).
Unemployment is officially 16%, but more realistically is over 20%
nationally (with over 900,000 unemployed). The northern region of
western Macedonia, where an estimated 20% of small businesses have shut
down during the recession, has an official unemployment rate of 22%.
Health, education and other public services are collapsing. There is a
process of social disintegration.
Angela Merkel and other eurozone leaders have
repeatedly denied that they are seeking to provoke a default on Greece’s
debt or force Greece out of the eurozone. Other leaders, however, appear
to contradict this line. For instance, Wolfgang Schäuble, the German
finance minister, has threatened that if Greece does not meet the
conditions set by the troika, payments will stop (regardless of the fact
that Greece urgently needs cash to pay its bills and refinance debts in
October). "Then Greece has to see how it gets access to financial
markets without help from the eurozone", said Schäuble. "That’s Greece’s
problem".
The Netherlands prime minister, Mark Rutte, went
even further: "Countries which are not prepared to be placed under
administratorship can choose to use the possibility to leave the
eurozone". (International Herald Tribune, 9 September)
It may be that some of the eurozone leaders are
bluffing, and their statements are intended to maximise the austerity
measures implemented in Greece. However, they are playing an extremely
dangerous game. Christine Lagarde, the head of the IMF, has recently
warned about the rise of social tensions as a result of austerity
measures. Massive strikes, demonstrations and other protests have
continued unabated in Greece – and, at a certain point, will result in a
social explosion.
Debt default and eurozone exit
PUSHING FOR EVEN greater austerity measures,
eurozone leaders are ignoring the reality that Greece’s debts are
absolutely unsustainable. While political leaders are repeatedly stating
their determination to defend the eurozone and avoid a breakup,
strategists closer to the investment banks and other financial
institutions are quite clear that, sooner or later, there will be a
Greek default. That would mean a Greek exit from the eurozone.
For instance, Nouriel Roubini, who has a far more
realistic view than most commentators, argues that Greece will never
resolve its debt problem within the straitjacket of the euro. In order
to stimulate economic growth, the precondition of debt reduction, Greece
would have to be able to devalue its currency in order to boost exports.
Clearly, this would mean abandoning the euro and returning to the
drachma. The drachma would undoubtedly sharply fall in value against the
euro. This would enormously increase the foreign debt, in drachma
values, of the Greek government, banks and businesses. In reality,
Greece would (like Argentina in 2001) have to write off a significant
part of these debts by revaluing the debt in drachma terms. Greece would
undoubtedly become a pariah on financial markets, unable for a time to
borrow from European and international banks. As in Argentina (comments
Roubini), the situation would mean ‘bank holidays’ (denying or limiting
savers access to their accounts) and capital controls to prevent a
flight of capital out of the country.
Roubini argues that an orderly default and exit from
the euro, although inevitably imposing extreme hardships on the Greek
working class for a period, would be preferable to the "slow disorderly
implosion of the Greek economy and society". He argues that there should
be international, coordinated action to recapitalise the banks and other
financial institutions suffering losses on their Greek loans. Moreover,
international banks should step in to recapitalise the Greek banks,
which would also suffer massive losses on Greek government bonds.
In theory, an approach along these lines, based on a
coordinated, international intervention to mitigate the problem of
unsustainable debt in Greece, would be preferable to blundering into an
explosive collapse of the Greek economy and all the uncontrolled
repercussions this would have in Europe and beyond. However, the
capitalist markets do not function in an ‘orderly’ way, and recent
events demonstrate the complete lack of policy coordination between the
leaders of the advanced capitalist countries.
Default on the country’s debt and exit from the
eurozone would not, in themselves, provide a solution for the working
class of Greece. As in Argentina 1999-2002, the Greek ruling class would
attempt to throw the burden of crisis onto working people. In time, the
return to the drachma and devaluation would boost exports and possibly
see a return to growth. In the short term, however, this would be on the
basis of low wages, shortages of food, fuel and other essentials, and a
degradation of public services.
To protect the interests of the working class it
would be necessary to nationalise the banks and cancel the debt held by
foreign big business and financial institutions, while protecting the
savings of working people. It would also be necessary to take over the
commanding heights of the economy (with minimum compensation on the
basis of need) to ensure the supply of essential goods and services.
Priority should be given to reconstructing public services such as
health, education, etc. Control of the economy should be through bodies
of democratically elected representatives from the trade unions,
community organisations, and the wider public. On a capitalist basis
there is no easy way out.
Eurozone banking crisis
THE EUROZONE SOVEREIGN debt crisis is interlinked
with a Europe-wide banking crisis. In 2008, eurozone governments
intervened to bail out a number of shaky banks. But they did not carry
out the kind of large-scale recapitalisation of banks that took place in
the US under the Troubled Asset Relief Programme. Only eight eurozone
banks out of 91 failed the recent ‘stress tests’, a theoretical test to
determine whether banks can withstand another financial crisis. The big
investors and speculators, however, are not convinced that all the banks
are healthy. In fact there was recently a leaked IMF report which said
that eurozone banks need €273.2 billion of additional capital. Lagarde
commented that the eurozone crisis was entering "a dangerous new phase"
and called for part of the EFSF funds to be used to recapitalise banks.
This provoked strong opposition, some from political leaders who object
to EFSF funds being used to prop up banks, and some from the banks
themselves which deny that they are in trouble.
Nevertheless, there are clear indications of a new
crisis building up in the eurozone banking sector. For a start, banks
are refusing to lend to one another, preferring to park their cash in
the ECB, even if this earns them a lower interest rate. A more startling
recent development is the fact that Siemens, the giant German
engineering firm, has deposited almost half its cash reserves (€6bn)
with the ECB, rather than with commercial banks. Eurozone banks have
also had difficulty in securing dollar loans from US banks, vital
funding to conduct their US and global business. The ECB was forced to
step in and offer eurozone banks unlimited dollar funds on the basis of
three-month loans (though this will cost the banks more than loans from
the commercial money markets, which have begun to dry up).
In mid-August the focus turned to the French banks.
A rumour circulated that Société Générale was in trouble, and there was
a massive fall in its share price (with a 50-60% fall between June and
September). Société Générale shares were worth €52.7 in February, while
by early September they had fallen to €21.19. Société Générale holds €2
billion of Greek bonds, while BNP Paribas holds €4 billion and Crédit
Agricole holds €800 million. Big investors and speculators fear that a
Greek government default on its debts would precipitate a deep crisis
for these three major French banks, which play a key role in the French
economy. French government ministers assert that the fears about these
banks are ‘irrational’. Any short-term liquidity problem (ie a shortage
of funds to cover current business) would be covered by intervention by
the ECB. They deny that there is a basic solvency problem, asserting
that these banks have enough capital reserves to survive a Greek default
and other shocks. French ministers have furiously rejected the idea that
they are discussing plans to nationalise these banks. This is
reminiscent of the position of Gordon Brown and Alistair Darling at the
time of the Northern Rock bank crisis in 2007/08.
Lagarde, however, let the cat out of the bag. When
she was previously French finance minister, she claimed there was no
problem with the French banks. Since taking over as head of the IMF,
however, she has called for a recapitalisation of the major French banks
and other banks in trouble using the EFSF funds. There has been a
furious reaction against this. On the one hand, any such bailout would
confirm that these banks have a solvency problem, and could actually
exacerbate their situation. On the other, existing shareholders are up
in arms because a government bailout (which would involve the government
buying shares in the banks) would effectively dilute the value of shares
of existing shareholders.
Eurozone leaders’ disarray
UNDER THE IMPACT of the economic crisis there has
been a sharpening of national tensions within the eurozone. There are
also divisions within the leadership of the German government, the key
power in the eurozone. Merkel has faced growing opposition from leaders
of the Bavarian Christian Social Union (CSU) and the Free Democratic
Party (FDP), the Christian Democrats’ coalition partners. These leaders
have been playing the euro-sceptic card, reflecting the growing
opposition in Germany to bailing out Greece and other so-called
peripheral states.
The lack of decisive action at eurozone summits
shows that the eurozone leaders are in complete disarray. Each time they
proclaim everything will be fine, Greece will not be allowed to default
or be pushed out of the eurozone. The big investors in financial
markets, however, do not take these reassurances seriously. Most of the
strategists who speak for investment banks, etc, now believe that a
Greek default is inevitable and will result in an exit from the eurozone.
The leadership of the ECB is also divided. While
buying Greek, Portuguese and Irish government bonds in order to keep
down interest rates for their respective governments, Trichet and other
ECB leaders repeatedly stated that they were against large-scale
intervention to support other eurozone governments. However, the
speculation against bonds of the Italian and Spanish governments, which
was forcing up their interest rates at the beginning of September,
forced the ECB to intervene with large-scale purchases of these bonds.
This provoked the resignation of the German representative, Jürgen
Stark. There is now an intense battle between those ECB leaders who
believe that an even bigger intervention is required. They argue that
unlimited support for the bonds of threatened governments would stave
off a sovereign debt crisis. However, other ECB leaders are still
intransigently opposed to this kind of intervention. They believe that
the ECB’s role should be strictly limited to monetary policy, ie setting
interest rates and regulating the money supply.
There is also a growing difference between
capitalist leaders over economic policy. The prevailing policy, upheld
by Merkel and other eurozone leaders, is that ‘fiscal consolidation’ is
imperative to reduce deficits. This means severe austerity policies.
However, this has produced a new downturn in the European economy and,
as Timothy Geithner, the US Treasury secretary, has warned, now
threatens the whole global economy. The fall in government spending and
massive cuts in public-sector jobs have set in motion a downward spiral:
declining consumer spending, weak investment, higher unemployment, and a
decline in tax revenues that can result in even bigger deficits.
The ultimate stress test
A WARNING WAS recently sounded by Lagarde. While
advocating continued austerity for countries like Greece, she is –
without naming names – calling on the major European economies to adopt
short-term stimulus measures, while maintaining the aim of fiscal
consolidation in the longer run. She warned: "A vicious circle [of weak
growth and weak government balance sheets] is gaining momentum in Europe
and the US". "Political dysfunction" was feeding policy indecision in a
"dangerous new phase of the crisis". "Social strains", she warned, "are
evident in many parts of the world, not just in the countries undergoing
severe [fiscal] adjustment". (IMF, 15 September)
Since then, the IMF has published its latest
economic outlook. This forecasts global growth for 2011 to be 4%, but
warns that, unless there is concerted action to revamp economic
policies, there is a strong possibility of growth falling below 2%. In
the US and Europe, growth will certainly be under 2% and is likely to be
virtually stagnant, while there is zero growth in Japan. But, as the
Wall Street Journal comments (21 September): "It is unlikely that either
the IMF or the G20 will manage to produce a cooperative plan of action
this weekend, given the sharp political discord within the US and
Europe".
However, it may be too late for the major capitalist
economies to avoid a prolonged stagnation or a further downturn. The
ruthless pressure on Greece to intensify the austerity measures can
detonate an explosion in that country, which in turn would detonate a
meltdown of the eurozone. It is hard to imagine that Greece could
default on its debt and remain in the eurozone. That would undermine the
credibility of the whole eurozone. In any case, the only way Greek
capitalism could escape from its crisis would be through readopting the
drachma and devaluation. And if Greece takes this path, why should
others stick with the pain of eurozone austerity measures?
On the basis of the relatively strong growth of the
world economy since 2000, the eurozone appeared to become a success. But
the growth was based on huge volumes of debt, which are now at the heart
of the current crisis. Since the financial meltdown and economic
recession of 2007-09, the eurozone is being subjected to a severe stress
test – from which it will not emerge intact. At a certain point it will
break up; but how long the process will take and through what
permutations it will twist and turn cannot be predicted. The eurozone
has entered its endgame, only the moves and timescale are uncertain. |