The euro patient: ‘stabilised’ but still critical

The Greek bailout 2.0 has averted a default, for the moment. The new fiscal pact is a straitjacket that will aggravate Europe’s austerity-induced recession. Ireland’s referendum threatens to shake the EU and the eurozone. There is growing discord among EU leaders. Far from over, workers’ struggles against capitalist austerity will erupt on an even bigger scale. LYNN WALSH reports.

AFTER SEVEN MONTHS of wrangling, the troika, the Greek government and private bondholders have agreed to a second bail-out package. As a condition for the package, the Greek coalition, led by the technocrat Lucas Papademos and supported by Pasok and New Democracy, has agreed to further savage austerity measures. Leaders of the troika – the European Central Bank, European Commission and International Monetary Fund – claim that this package will stabilise the eurozone. But the savage austerity measures they have imposed on Greece will actually increase the burden of debt and ensure another default further down the line.

Greece will save around €100 billion through a managed default that has been agreed or imposed on the private bondholders. However, it is mainly a refinancing exercise rather than a wiping out of debt. Greece will receive bail-out funds of €130 billion or more – but these are loans from the European institutions and the IMF. The terms are less onerous than the previous bonds but, nevertheless, are new debt that will prove unsustainable. Most of the new bail-out funds will be used to recapitalise the private Greek banks (which have also suffered losses on the bond exchange) and to pay off previous debt and interest charges.

The private bondholders (mostly banks and finance houses) have been pushed into accepting a bond exchange which involves a 75% ‘haircut’ or reduction of the value of the bonds. Over 90% of the bondholders accepted the deal, but the ‘holdouts’ were forced to accept through the ‘collective action clauses’ imposed by the Greek government. Another section of private bondholders, with €20 billion not covered by Greek law, are so far holding out.

Official public holders of Greek bonds (the ECB, eurozone central banks, the IMF, etc) will not be suffering a haircut. While it may appear that the private sector is losing out, they are really "the lucky ones", as commentator Nouriel Roubini says. They are getting €30 billion upfront as a sweetener (paid from the €130bn new bail-out funds). In 2008, all Greece’s debt was held by the private sector. Now, 77% of the debt is held by the institutions of the troika.

"The reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors". "The reality is that most of the gains in good times – and until the PSI [public-sector involvement] – were privatised while most of the losses have been now socialised. Taxpayers of Greece’s official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece’s past, current and future insolvency". (Roubini, Financial Times, 7 March)

Moreover, eurozone private banks have received massive support from the ECB in the form of cheap (1% interest) three-year loans which, for the time being, will cushion the banks against their losses.

The second bail-out package will merely postpone the crunch for Greece. A report issued by the troika shows that, at best, Greece will still have a national debt of over 120% by 2020. This presages further drastic cuts in public spending, the sacking of 150,000 public-sector workers, and €45 billion privatisations by 2020. But if things go awry, the burden of debt (according to the troika) could peak at 170% in 2014 and still be 145% in 2020. "The new €130 billion that the official creditors have agreed to lend may not be enough even to cover Greece’s debt service [repayments to fund interest charges]". (Financial Times editorial, 21 February)

"Greece is just not in a sustainable position on several counts", commented Mats Persson, director of the think-tank Open Europe. "The extreme level of youth unemployment shows that the austerity cuts are fighting off any chance the country has of recovering. It will get worse; there’s no way Greece can get out of this". (Daily Telegraph, 9 March) "‘It will happen’, said Stephane Deo, a UBS economist, referring to the next Greek crisis. ‘The market is already pricing in’ a second round of restructuring".

From an economic point of view, the burden of debt in Greece is unsustainable. GDP fell nearly 7% in 2011, and is expected to fall by between 4% and 6% this year. Despite a series of general strikes and mass protests, the former Pasok government and, subsequently, the Pasok/New Democracy coalition appear to have got away with imposing devastating austerity measures. But, so far we have only seen act one. A recent comment in a Morgan Stanley bulletin recognises the likelihood of further social explosions: "Several episodes of social unrest have shown all too clearly that the extra-economic dimension of this tough adjustment programme is at times unpredictable". (Greek Debt Restructuring, 24 February) In fact, the working class and middle class will be compelled to intensify the struggle against austerity measures that spell utter social-economic catastrophe.

The role of the ECB

UNDER MARIO DRAGHI, who took over as head of the ECB last year, the bank has followed the policy of supporting the EU banks with a flood of cheap credit (the so-called Longer-Term Refinancing Operations – LTROs). This has come in two waves, one last December and the other in February. Over 800 banks have together borrowed around €1.2 trillion at 1% interest for a three-year term. This measure is cushioning the eurozone banks against losses on Greek and other government bonds. It is also an indirect way of supporting the borrowing of the eurozone governments, reducing the rate of interest that Italy, Spain, etc, are forced to pay on new bonds.

Much of this cheap credit has been used by the banks to refinance existing, more expensive loans. Some has been used to buy peripheral eurozone government bonds yielding a much higher return, reaping an instant profit for the banks. No doubt, moreover, some of the funds are being used for speculative activity. Very little is being channelled into the real economy through loans to business for investment and working capital.

Although the ECB studiously avoids the term ‘quantitative easing’, this is undoubtedly a form of QE – or Keynesianism for bankers. The German central bank, the Bundesbank, and German finance minister, Wolfgang Schäuble, in particular, have strongly opposed this ECB policy, warning that it is merely a temporary fix and could lead to an explosion of inflation. It is unlikely to produce inflation at the moment, however, because most of the cash is being hoarded rather than pumped into the economy. However, if there is a resumption of growth in the eurozone area, it could give rise to an acceleration of inflation.

Bundesbank president, Jens Weidman, has asked: What is the exit strategy? The ECB already has over €3 trillion of bonds and other collateral on its books (more than the US Federal Reserve). To reverse the liquidity injection it would have to sell a large part of these securities. But it is far from certain that this would be easily done, as many of the securities are considered too risky by private banks and finance houses.

The private banks are becoming more and more dependent on the supply of cheap credit from the central bank and from eurozone national banks. These public institutions have the first call on assets in the event of defaults. This in turn makes private investors wary of putting their capital into the private banks, as they would not get priority in the event of a default. In other words, they would bear the main losses of any banking collapse. This is giving rise to a situation where the ECB and the central banks are propping up zombie banks throughout the eurozone.

James Saft, a Reuters columnist, points to "a spiral of increased and institutionalised reliance on official credit, which will increasingly drive away free-market credit". This, he says, might be better than "a mass bank run in the eurozone", but "an institutionalised system in which banks depend utterly on official support, supporting in turn the governments in that system by holding their bonds, is one which, to put it kindly, cannot go on forever". (International Herald Tribune, 14 March)

The LTRO policy has postponed a liquidity crisis for banks that may have been hit by the enforced haircut on Greek bonds. It has also indirectly supported the borrowing of eurozone governments. Like the Greek bailout 2.0, the LTROs are essentially a stopgap measure that does not resolve the underlying crisis of insupportable levels of debt, and austerity-induced recession.

The fiscal pact

TWENTY-FIVE EU governments (with Britain and the Czech Republic opting out) have agreed a new fiscal pact. This is a legal straitjacket that aims to restrict governments’ budget deficits and national debt. However, it includes no measures that would concretely advance the eurozone towards a fiscal union. The pact limits ‘structural’ budget deficits to 0.5% of GDP (leaving room for arguments on the definition of ‘structural’). If the national debt of participating governments goes above 60% of GDP they will be compelled to take drastic, rapid measures to reduce the debt. In reality, these are completely unachievable targets for most EU countries. In so far as governments attempt to meet them, they will prolong or deepen the European recession. On the other hand, there are already indications – e.g. Spain – that governments will be forced to repudiate these unrealistic targets.

Many national leaders believed that the pact was a necessary cover for German chancellor, Angela Merkel, to get political support for further bail-out measures in Europe. They assumed that the quid pro quo for agreeing to the pact would be an increase in the bail-out funds available to shore up the finances of EU/eurozone governments. The German government and Bundesbank, however, are still intransigently opposed to new measures to support governments with shaky finances.

There is still no agreement between the EU and other G20 governments on the funding of the new European Stability Mechanism. It has been proposed by some eurozone governments that the residue of European Financial Stability Facility funds (€250bn) should be combined with at least €500 billion funds for the new ESM – providing a ‘super-fund’ of €750 billion to support shaky governments. This is still being resisted by the German government and others.

At the same time, the IMF is only prepared to cough up €28 billion to the new fund. The US has made it clear that it is not prepared to bail out the eurozone, which it regards as a task for the European powers, especially the strongest economy, Germany. The prime minister of Brazil has vociferously spoken against developing countries like Brazil, China, etc, being asked to bail out the wealthier advanced capitalist countries, whatever their current problems.

On the periphery

WITHIN HOURS OF the agreement on the pact, the Spanish prime minister, Mariano Rajoy, unilaterally announced that Spain would not be committed to the 2012 target of reducing its budget deficit to 4.4% of GDP (which would involve €5bn additional cuts). He announced that Spain would aim at reducing the deficit to 5.8% of GDP (claiming Spain would still aim for the 3% target by 2013). Rajoy bluntly told EU leaders: "This is a sovereign decision by Spain". He said that he had not consulted other European leaders: "I will inform them in April".

Rajoy clearly fears the prospect of a volcanic social explosion if they cut as deeply as the eurogroup are demanding. Spanish GDP is expected to fall by at least 1% in 2012. Unemployment is already officially 24%, while youth unemployment is over 40%.

Other eurozone leaders are furious, but what can they do? The recent violent clashes between police and protesters in Valencia and Barcelona are an indication of the struggles which are coming. The eurosceptic Daily Telegraph commented: "At a stroke Rajoy has demonstrated breathtaking defiance, heart-warming patriotism and a different path to recovery. But even worse, he pointed out the elephant in the room: the eurozone is a monetary union, not a political one, and if members want to run their own affairs, neither Brussels nor Berlin can stop them".

There are growing demands in Portugal, too, for the renegotiation of the country’s €78 billion debts. GDP is expected to fall by around 6% this year, emphasising the vicious spiral of cuts, unemployment and recession.

The Irish government, moreover, has demanded postponement of a €31 billion payment to the EU on 31 March. This is a further instalment of repayments of the loans that were used to bail out the private banks in Ireland. Emphasising the link between the bank bailout and austerity measures, this payment is due on the same day as the first payment of the new household tax. The request was met with a hostile rejection from the EU finance commissioner, Olli Rehn, who called on Ireland to "respect your commitments and obligations". He brushed aside references to the fact that, on the basis of high interest rates, the Irish government will be paying €47 billion for the €31 billion loan.

The European economies are in the throes of an austerity-induced recession, which is likely to be protracted. "These days", comments Paul Krugman, "austerity-induced depressions are visible all around Europe’s periphery". (International Herald Tribune, 13 March)

Rehn claims that Europe is suffering from "a mild recession", with eurozone growth expected to fall by 0.3% in 2012. However, a number of eurozone countries are experiencing a real slump, which is a drag on the wider European economy. Outside the eurozone, Britain is flat-lining. The current estimates for the weaker eurozone countries look grim: Greece, 4.4% fall; Portugal, 3.3% fall; Italy, 1.3% fall; and Spain, 1.7% fall.

If the signs of growth in the US economy are sustained, it will possibly cushion the European economy, allowing a slight growth of exports to the US. However, the best scenario for Europe is likely to be a relatively mild recession, but with the prospect of prolonged stagnation. Unemployment is horrendous. Officially, over 24 million workers are jobless in the EU, while youth unemployment has soared above 50% in Spain.

The EU’s failed objectives

THE SECOND GREEK bailout has temporarily stabilised the Greek government and defused the default time bomb ticking under the eurozone. But it is essentially a temporary fix which does nothing to resolve the underlying problems. It will not break the vicious spiral of repeated austerity packages, ever rising mass unemployment, falling tax revenues, and recession. Neither the eurozone leaders nor the G20 leaders have any policies to overcome this bleak situation.

Greece’s state debt remains unsustainable, and will become even more of a burden through the prolonged slump of the Greek economy. The issue of default will be posed again, and will not be so easily avoided next time as most of its debt is now held by public institutions. If Greece should default it is hard to see how it could remain in the eurozone. And the exit of Greece – or any other defaulting country for that matter – would raise the prospect of a breakup of the eurozone as a whole. It would be impossible for the ECB or the major eurozone governments or the G20 to guarantee the stability of all the other eurozone governments.

Germany, the strongest economy and the major EU power, has imposed harsh conditions on the weaker economies of southern Europe. But, despite its budget and trade surpluses and the advantages it has gained from the euro, German capitalism has made no contribution to stimulating growth throughout the eurozone. Now the position of the Christian Democrats is threatened as polls and developments on regional state level indicate. There are also increasing tensions in the Franco-German axis which has been at the centre of eurozone policy. Facing possible defeat in the imminent presidential elections, Nicolas Sarkozy has resorted to advocating protectionist measures and whipping up opposition on the issue of border controls.

The calling of a referendum by the Irish government to ratify, or reject, the new fiscal pact also poses a threat to the future of the eurozone. Legally, the agreement of only twelve out of the 17 eurozone states is required to ratify the pact. However, despite the huge efforts that will be made by the capitalist parties to secure ratification of the treaty, there is the possibility of a majority voting against the pact, especially as the austerity measures bite even harder. This would raise the issue of Ireland’s continued participation in the eurozone, and even its position in the EU itself.

Both the EU and the eurozone have already failed in their key objectives. The European Union was intended to overcome national differences, and particularly bury the historic antagonism between Germany and other European states. In the recent period, however, Germany has been seen as a dictatorial power, imposing harsh economic policies on the weaker European states. This has reinforced an upsurge of nationalism and xenophobia, with the growth of anti-immigrant, racist trends. At the same time, the eurozone was intended to accelerate the economic integration of EU countries. In practice, it has intensified the divergence between the stronger economies and the weaker countries, especially those of the Mediterranean ‘periphery’. The eurozone has become a time bomb under the whole world economy.

The idea that capitalist states could overcome their national limitations and achieve an integrated, harmonious Europe has been shown to be utopian. The unification of Europe is a task for the working class, which can only be achieved on the basis of workers’ democracy and socialist economic planning.