Written by International Marxist Tendency Thursday, 22 March 2012 14:53
Our tendency did not think the euro could even be founded, because of the impossibility of uniting economies headed in different directions. But for a while they in fact got away with this, due to the prolonged capitalist boom. In a 1997 document, “A Socialist Alternative to the European Union”, we pointed out that the euro would collapse “amidst mutual recriminations.” This scenario is now beginning to unfold before our eyes. [part 1]
The crisis of European capitalism
The eurozone is passing through the most serious crisis in its entire history, which places a big question mark over its future existence. As we predicted long ago, in a serious crisis, all the national contradictions come to the fore, as we now see with the fractious relations between Greece, France, Germany and Italy. The European Union is facing the day of reckoning.
None of these things were supposed to happen. The terms of the Maastricht Treaty prohibited big debts and budget deficits. But Maastricht is now only a dim memory. Theoretically, since all are members of the same single currency, with the same central bank setting a single benchmark interest rate, each country should be able to borrow at near enough the same rates. However, in 2010 the markets began to distinguish between the stronger eurozone economies—Germany and its satellites (Austria, the Netherlands and a few others), and the weaker economies like Greece, Ireland, Spain, Portugal and Italy. Now, even stronger economies, such as France, Austria and the Netherlands, are being affected. Standard & Poor's has even warned that 15 of the 17 eurozone members could have their credit ratings downgraded, with a question mark being placed even over Germany.
Increasingly, the latter are being charged punitive rates for money borrowed from the money markets. The increased charges make the burden of debt heavier and even harder to repay. So when a credit agency like Moody’s lowers the credit status of a country, this action becomes a self-fulfilling prophecy. The yield on Italian bonds rose to almost 7.5 percent before the collapse of the Berlusconi government.
We pointed out even before the euro was launched that it is impossible to unify economies that are pulling in different directions. Now some bourgeois economists are warning that the pressures and tensions building up can lead to the collapse of the single currency. For the first time, the question is openly being aired of the possibility of the breakup, not just of the euro, but of the EU itself. The slump in the euro is an expression of the insoluble contradictions of the European Union.
We have already seen the failure of some major European banks, which has contributed to a general climate of nervousness. In the United States we saw the failure of MF Global, the largest Wall Street firm to collapse since the Lehman Brothers implosion in September 2008.
At a certain point, all this could trigger a similar effect to the collapse of the Austrian Credit-Anstalt bank in May 1931. The fall of Credit-Anstalt, which was considered to be invulnerable, caused the dominoes to topple across continental Europe, and the resulting wave of panic was felt as far away as the U.S. In the same way, a Greek default could spread the financial crisis, not just across Europe but across the globe.
Greece: the weakest link
The crisis in Europe began in Greece, and although it was somewhat delayed in Germany, Austria and Scandinavia, it has begun to spread. Sooner or later, they will all be pulled into the maelstrom.
In an attempt to calm the markets, France and Germany initially insisted that Greece remain an “integral” part of the single currency. But although these bold speeches had the effect of temporarily stabilizing the markets, they were mere words and were soon scattered to the four winds. Greece was forced into what amounts to a partial default. The international finance markets, however, are in fact working on an assumption that Greece will default completely.
In 2010, Athens borrowed the equivalent of 10.5 percent of annual economic output, just to fund general government spending. Greece clearly cannot pay its debts, and the only result of the austerity imposed on it by the eurozone leaders is to push it further into the morass of recession, unemployment and misery. Even if the latest plan is carried out to the letter—which is supposing a lot—the Greek deficit will still stand at 120 percent of GDP by the year 2020, while the people of Greece will suffer further falls in living standards.
In return for “aid”, the Greek government is being squeezed to extract the last drop of blood from the Greek people, but in the end Greece will not be able to pay its debts. That is the first problem. The second is that countries like Finland, Slovakia and the Netherlands are raising problems over wider bailout funding. More importantly, the mood in Germany is hardening on this issue.
It seems almost inevitable that Greece will eventually be ejected from the EU. But this will have the most serious consequences both for Greece and the entire EU. All the objective conditions for revolution existed in Greece in the last eighteen months:
- The capitalist class was split, and had lost its confidence
- The middle class was wavering and inclined to support a revolutionary overturn
- The working class was in struggle and prepared to make the greatest sacrifices to move forward
What more could one expect from the Greek working class? What more could they do? If they did not take power, it was not their fault, but the failure of each and every one of the so-called leaders. The failure of the leadership is all that was holding back the workers. If the leadership of the Greek Communist Party had adopted a correct Leninist standpoint, both in terms of its programme and in terms of applying correctly the policy of the united front, the question of power would already have been posed. In many ways the situation was far more advanced than it was in Russia in February 1917.
After the first general strikes in Greece, the slogan of the 24-hour general strike became meaningless. The movement had gone beyond that. The only adequate slogan was that of an indefinite general strike. But in a situation like that of Greece, this raises the question of power. You cannot play with this slogan. It has to be linked to the development of organs of popular power—action committees or soviets—linked to the trade unions.
It is possible that a section of the ruling class is toying with the idea of a coup. But after the experience of the Junta in the 1960s, the Greek workers would not accept passively the imposition of a dictatorship. Such a move would certainly result in civil war. The problem is that the bourgeois would not be confident of winning. The Greek working class is far stronger than it was then; its organizations are intact and have not suffered a serious defeat for decades.
For this reason, and not from any sentimental attachment to democracy, the ruling class will attempt to achieve its ends by other means, starting with a government of “national unity”. This will end in a further intensification of the class struggle, a sharp polarization to the right and left and a series of unstable bourgeois governments. Before matters can be decisively settled in either a revolutionary or counterrevolutionary way, the pendulum will swing violently to the left and right. Before the ruling class resorts to open reaction, the working class will have many opportunities to take power.
Back to the Drachma?
Some on the Greek Left are advocating exit from the Euro without posing the question of the Socialist United States of Europe. “Bring back the drachma!” is their nationalist cry. But in practice, if a capitalist Greece leaves the European Monetary Union, it would inevitably mean leaving the EU as well. This would leave it with no trade agreement with Europe. To imagine that the EU would remain with its arms folded while cheap Greek products invaded its markets is completely utopian. An isolated Greek economy would immediately find itself the victim of protectionist measures, as the Swiss bank UBS pointed out:
“The idea that a seceding state would immediately have a competitive advantage through devaluing the NNC [new national currency] against the euro is not likely to hold in reality. The rest of the euro area (indeed the rest of the European Union) is unlikely to regard secession with tranquil indifference. In the event that a NNC were to depreciate 60 percent against the Euro, it seems highly plausible that the euro area would impose a 60 percent tariff (or even higher) against the exports of the seceding country. The European Commission explicitly alludes to this issue, saying that if a country was to leave the euro it would ‘compensate’ for any undue movement in the NNC.” (Global Economic Perspectives, 6 September 2011, UBS)
The UBS roughly estimates the cost for a weak country like Greece that chooses to leave the euro. It assumes that any such country leaving the euro would see its currency fall by around 60 percent against the rump euro bloc. Such an event cannot be compared to the mild adjustments of the Exchange Rate Mechanism convulsions in the 1980s or early 1990s. Instead, the more appropriate parallel probably lies in the economic implosion of Argentina a decade ago.
“The mass sovereign and corporate default would generate an increased risk premium for the cost of capital—assuming that the domestic banking system is in any way capable of providing capital. At a very conservative estimate, this would entail a 700bp risk premium surge. If the banking system is completely paralysed (again, Argentina provides some precedent, or the U.S. banking system during the collapse of the U.S. monetary union in 1932-33) then the cost of capital de facto increases an infinite amount. In the extreme paralysis of finance, capital is not available at any price.” (Global Economic Perspectives, 6 September 2011, UBS)
The Swiss bank further assumes a decline in the volume of trade of 50 percent, and the adoption of protectionist tariffs to offset the currency depreciation of the seceding state. It also assumes losses to the banks of around 60 percent (“Of course, we are also assuming a run on the banks before secession takes place.”)
“Taking all these factors into account, a seceding country would have to expect a cost of €9,500 to €11,500 per person when seceding from the euro area. It should be borne in mind that while bank recapitalization could be considered a one-off cost, the cost of higher risk premia and trade stagnation would be borne year after year. So the initial economic cost would be €9,500 to €11,500 per person, and then a cost of around €3,000 to €4,000 per person would be felt each year thereafter.”
And the bank adds: “These are conservative estimates. The economic consequences of civil disorder, break-up of the seceding country, etc, are not included in these costs.”
The Greek Revolution, in turn, must be linked to the perspectives of a European revolution. But the Lefts, and especially the Stalinists, are infected with the disease of nationalism. They imagine that the problems in Greece can be solved within the narrow confines of capitalism and within the borders of Greece by leaving the EU. This is a road to disaster. In reality, there is no future for Greek capitalism, either inside the EU or outside.
Is there a parallel with Argentina?
A re-established drachma would be worthless. The collapse of the currency would fuel inflation, wipe out savings, and cause massive unemployment. It would be a situation like 1923 in Germany, which destroyed the currency and brought about a revolutionary situation.
There would be a run on the banks, as occurred in Argentina a decade ago, when desperate people took to sleeping in front of cash points so they could withdraw money as soon as the machines were refilled. Before a default, companies and individuals withdraw as much cash as possible. In Greece, money is already flowing out, much of it to Cyprus, Switzerland and London.
In Argentina's case, defaulting on $93bn of foreign debt—the largest ever national bankruptcy—resulted in a 60 percent fall in domestic consumption as households saw their assets wiped out and inflation took hold. All imported goods, whether a BMW or a bag of rice, became unaffordable luxuries.
The banks would shut their doors. Supermarket shelves would stand empty. The rich would fill their suitcases with dollars and head for the nearest airport. Stephane Deo of UBS writes: “If a country has gone to the extreme of reversing the introduction of the euro, it is at least plausible that centrifugal forces will seek to break the country apart... monetary union break-ups are nearly always accompanied by extremes of civil disorder or civil war.”
In a national bankruptcy, lending comes to a halt and corporate life seizes up. Unemployment and poverty soar. In Argentina's case, the jobless rate came close to 25 percent. By 2003, the numbers in “extreme poverty” reached 26 percent of the population, with more than 50 percent deemed below the poverty line. The workers took over failed businesses and ran them under workers’ control. Local assemblies, which helped distribute food and organise healthcare, also sprang into being.
The economic collapse in Argentina produced a revolutionary situation, but there was no revolutionary party capable of leading it. In 2001 there was an insurrectionary situation in Argentina. President Fernando de la Rúa fled by helicopter from the roof of the Casa Rosada palace. Days later the country officially defaulted. If a genuine Bolshevik leadership had existed they could have taken power. The sizeable “Trotskyist” sects there proved utterly incapable of carrying the movement forward, and the opportunity was lost.
Up to this point, the parallels between Athens and Buenos Aires are very clear. A Greek exit from the euro would be just as painful. And there would be serious political consequences. But here the analogy ceases. Once the revolutionary opportunity was missed, the ruling class recovered its nerve and the situation was eventually reversed. Once assets in Argentina became 80 percent cheaper, foreign buyers returned. Argentina bounced back from the horrors of December 2001 faster than expected, thanks to the devalued peso.
This led to a swift recovery in exports and the country soon swung into a massive trade surplus. Economic growth rose to 8.7-9.2 percent between 2003 and 2007 and unemployment fell. This is taken as a hopeful precedent for Greece. But the comparison is misleading. The Argentine economy benefited from the world boom in capitalism and the soaring demand for its agricultural produce, such as Chinese demand for soya. But a Greek default will take place in very different circumstances: a world economic slump, contracting markets, falling demand and protectionism.
Greek capitalism would derive no benefit from the devaluation of its currency, but would suffer the dire consequences of imported inflation, hostile protectionist measures from its former EU partners, the collapse of its banking system and the drying up of credit and investment. It would mark a new and fatal twist in a downward spiral of economic, social and political crisis pregnant with revolutionary possibilities.
Threat to the EU
After dragging down Greece, Ireland, Portugal and Spain, the wolves turned their attention to Italy, which has an enormous mountain of debt, amounting to around 120 percent of the country's gross domestic product. This is the second-highest level in the EU after Greece. Moreover, Italy has €335bn of loans maturing in 2012, much more than Greece, Ireland and Portugal put together. It will need to borrow hundreds of billions, and each time it asks for a loan, investors around the world are likely to worry whether they will be repaid, given its huge public debt.
This poses a threat to the very existence of the eurozone. The European Central Bank might be able to keep Greece afloat for a period (although even this is extremely doubtful). It managed to stage a bailout for Ireland and Portugal, which has solved nothing. But there is simply not enough money in the ECB to bail out countries the size of Spain or Italy. Any attempt to do so would soon exhaust the bank’s funds.
Top EU officials have warned that the eurozone crisis could wreck the European Union. The leaders of Germany and France were forced to give more money to Greece in a bid to avoid a default that would have caused chaos. European Commissioner for Economic and Financial Affairs Olli Rehnsaid:
“Whatever way you look at it, it is absolutely certain that a default and/or exit of Greece from the eurozone would carry dramatic economic and social and political costs, not only for Greece but also for all other euro area member states and EU member states, as well as for our global partners.”
At the onset of the Greek crisis, the bourgeois consoled themselves with the idea that only the states on the edges of Europe were in trouble. But the idea of what the markets regard as the risky periphery got bigger and keeps expanding from one day to the next. European stock markets experienced new and ever steeper falls. The idea that you can isolate Greece—or Britain, or Ireland—is a foolish illusion. They are all in the same boat, and the fact that some may be first class passengers doesn’t save them if the boat starts to leak where the second class passengers are seated.
What does all this mean for the people of Ireland and Portugal? It means that all the sacrifices have been in vain. The workers and farmers of Ireland are being asked to make ever bigger sacrifices to pay the moneylenders. But, as in Greece, the continuing attacks on living standards only serve to undermine the economy. Ireland is even less able to pay its debts than previously.
When Greece defaults, the Irish and Portuguese will say “Why should we pay?” The consequences of a Greek default for the rest of Europe would therefore be extremely serious. It would trigger a chain reaction of collapsed banks in other countries. French banks are heavily exposed to Greece, but so are German banks. Austrian banks are exposed to Italy, and so on. The results would be catastrophic for Europe, and not only for Europe.
The markets have lost confidence in European banks, threatening to provoke a banking crisis not only in Spain and Italy but also in France and Belgium. The Franco-Belgian bank Dexia had to be nationalized in October to prevent collapse. This was supposed to be a “healthy” bank. In fact it came 12th out of the 90 biggest banks that underwent the famous European Banking Authority’s “stress tests” in July 2011. Shares in three French banks plummeted over concern at exposure to Greek debt. Moody's downgraded Credit Agricole and Societe Generale, and left a big question mark hanging over BNP Paribas.
The French banks are particularly exposed to Greece. The accumulated debt of France is €1.6tn (83 percent of GDP). The state debt is increasing at 7-8 percent per year, in spite of the cuts. In 2011 the deficit was €150bn. If this continues it will lead to a general collapse of finances in France as in Greece. That is what encouraged Sarkozy to say he will “do everything to save Greece.” But this kind of “aid” is like being tightly embraced by barbed wire.
The trouble is that, while everybody wants to save the euro, nobody wants to put their hands in their own pockets. It is a measure of the desperation of the leaders of Europe that they have been pleading with the BRICS grouping—Brazil, Russia, India, China and South Africa—to provide money to help solve their difficulties.
All this talk has led nowhere. Sarkozy went to China, where he was politely but firmly informed that China was not prepared to help. The reason is that they are not sure they would get their money back. In any case, they fear that their own economy may be slowing down, so they will need the money to help themselves. As is well known, charity begins at home.
German Chancellor Angela Merkel has warned that the eurozone risks a “domino effect” if it does not pull together. “The top priority is to avoid an uncontrolled insolvency, because that would not just affect Greece, and the danger that it hits everyone—or at least several countries—is very big,” she said. “I have made my position very clear that everything must be done to keep the eurozone together politically, because we would soon have a domino effect.”
These are not idle words. The crisis is spreading fast. Italy's debt stands at 120 percent of gross domestic product, and places Italy directly in the line of fire of the bond markets. Italy's borrowing costs hit a new high over debt fears. In September 2011, the interest rate on Rome's five-year government bonds rose from 4.93 percent to 5.6 percent, but soon soared to an impossible 7.5 percent. If yields remain above that level, then markets develop their own unstoppable momentum.
Italy is one of the seven leading industrial nations (G-7) and the eurozone’s third-largest economy. A crisis in Italy would have devastating effects in the whole of Europe. The trigger for the market uncertainty was the instability of the government in Rome. Deep scepticism about the country's finances is what led to the fall of Berlusconi.
Italian capitalism has dragged behind its main rivals. This weakness was partially masked by the boom, but was cruelly exposed by the global economic and financial crisis. Since the start of the crisis, Italy has only been able to manage growth of a single percentage point annually. In the first quarter of 2011, it was just 0.1 percent, well below the eurozone average of 0.8 percent, with no prospects of a recovery. Investors suddenly started asking how the government in Rome plans to ever pay off its debts.
In these conditions, Giorgio Napolitano, President of the Republic, appealed to the opposition for “national resolve.” And he quickly got what he wanted. All three opposition parties in parliament pledged not to stand in the way of the passage of a package of austerity measures. But Berlusconi’s programme was too little for the bosses and too much for the workers. The Italian parliament endorsed the Berlusconi government's 54.2 billion euro austerity package, but this was immediately followed by demonstrations and a general strike in early September.
The ruling class knew, therefore, that it could not depend on Berlusconi to defend its interests and that is why they moved against him. The President of the Republic, Giorgio Napolitano stepped in and asked Berlusconi to resign. He then appointed Mario Monti a life senator and immediately gave him the task of forming a new government. The government is made up of unelected so-called “technocrats”: bankers, lawyers and so-called technical experts. The task of such a government is to impose draconian austerity measures quickly. Initially, it enjoys the support of all the main political groupings in the Italian parliament, except for the Northern League.
The manner in which Monti was imposed on the Italian people as prime minister is an indication of how severe the crisis is. The bourgeoisie of Europe is running whole countries by imposing bankers and EU bureaucrats on them (Papadimos in Greece was an ex-ECB Vice-President), doing away temporarily with the niceties of bourgeois parliamentary democracy.
Such a government, however, cannot last for long as it lacks what many bourgeois commentators have termed “democratic legitimacy”. Once its measures become clear to the workers and youth there will be a massive backlash and the country will have to go to elections.
Under these circumstances the bourgeoisie eventually will have no alternative but to pass the poisoned chalice to the “Centre-Left”, whose ex-Communist leaders are eager to drink it to the dregs. The leaders of the “Left” in Italy behave as their equivalents in every other country. No sooner does the ruling class lift its little finger than they fall over themselves in their haste to demonstrate to the capitalists that they are “responsible statesmen” who can be relied upon to hold high office. This shameful conduct may convince the ruling class that the “Left” can safely be entrusted with the administration of capitalism, but the working class will pay a heavy price for this “responsibility”.
Economists have repeatedly stressed that “Italy isn't Greece or Portugal,” and “Italy's economic fundamentals aren't that bad.” That may be true, but it will not convince the markets in their present state of nervousness. The Corriere della Sera appealed for calm: “It doesn't help to get excited about international speculators. If we conduct ourselves seriously then we have nothing to fear. Unfortunately we have not been serious up until now. For that, the markets are paying.”
The question is: exactly how are Italians supposed to demonstrate their “seriousness” to the markets? The answer is provided by Greece: only through massive cuts in living standards. The present mood of sullen acquiescence will turn into fury. The scenes we have witnessed in Greece will be replicated in Italy, despite all the efforts of the leaders to avoid it.
Germany and the euro
Twenty years ago, after the collapse of the U.S.SR, the German ruling class had big ambitions. Their idea was that a unified Germany could dominate Europe, achieving by its economic muscle what Hitler failed to do by military means. Over the past two decades, France has been increasingly pushed into second place and Germany now rules the roost in Europe.
These ambitions of the German ruling class have blown up in its face. The economic destiny of Germany is now indissolubly linked to a Europe that resembles a hospital ward for the terminally sick. The idea of a closer European Union appealed to those sections of the German ruling class that still entertain delusions of grandeur. But the past 20 years have also convinced Germany that such ambitions can come with a very hefty price tag. This contradiction has been exposed by the recent debate on the possible creation of “Eurobonds”.
Germany has a lower level of debt relative to other European countries. In the last decades, the German capitalists have been relentlessly squeezing the workers. In 1997-2010, hourly productivity in German manufacturing went up by 10 percent, while wages were cut by about the same amount. The overall effect has been to cut unit labour costs by 25 percent relative to the countries in the European periphery (PIIGS). Although German workers earn more than most other European workers, the rate of exploitation is higher. This is the secret of German competitiveness. The problem is that in the end you need to sell the goods somewhere.
During the boom period, Greece – and the rest of Europe – was buying German goods—with German credit. This was a consumer boom, and also a banking boom. The Germans loaned lots of money and made lots of money from the interest. But all this has a limit.
The strength of Germany is more apparent than real. The destiny of the German economy depends on what happens in the rest of Europe. If the euro goes down, it would have a devastating effect on Germany. Germany is expected to carry the whole of Europe on its back, but its shoulders are too narrow to bear such a weight. The Germans are attempting to prevent a Greek default, not out of altruism, but in order to save the German banks. They hope to stop the rot from spreading to other countries. German banks hold €17 billion in Greek debt, but have €116 billion in exposure to Italian debt.
Germany had to prop Greece up. They simply had no choice. However, Germany cannot afford a Spanish or Italian default. But neither can they afford to bail these countries out. The realization is gradually dawning in Berlin that the rapid spread of the economic crisis threatens to drag Germany down. They failed to solve the Greek crisis by a huge injection of cash. And there is not enough money in the Bundesbank to underwrite the debts of Spain and Italy.
That is why the idea of “eurobonds” is opposed by Germany, who would have to foot the bill. It would also require a new round of EU treaty negotiations. This would be a most painful experience, which, far from leading to a united Europe, would expose all the underlying contradictions and frictions between the different nation states. Instead of creating a united Europe, it could actually hasten the breakup of the EU.
[To be continued...]