So as the financial crisis inside the EU intensifies I thought I’d look at a recent socialism today article
By Lynn Walsh, Editor, Socialism Today, monthly magazine of the Socialist Party (CWI England & Wales)
The European economies are in the throes of an austerity-induced recession, which is likely to be protracted.
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.
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.
Greece’s Finance Minister Evangelos Venizelo (Pasok)
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.
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.
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.
Jean Claude Juncker, head of the group of 17 euro zone finance ministers, with his Spanish counterpart.
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.
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”.
Spain’s prime minister Mariano Rajoy with German chancellor Angela Merkel in January
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”.
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 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.
It is clear that the EUrozone and beyond is on very shakey ground with littleprospect of this changing anytime soon. Capiatlism is bankrupt of ideas out of this crisis of its own making and is still looking to make us all pay for it.
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.