Last May (Is the euro dead?, 25 May 2010), I argued that the euro would not collapse under the pressure of international bond markets, leading the weaker capitalist economies of the Eurozone into defaulting on their government and bank debts.
As I said then: “This sovereign debt crisis is a product of an expansion of debt in the government sector, as politicians desperately tried to bail out the banks and avoid a Great Depression. Government bailouts of the financial sector and spending to keep enough people at work have led to huge government budget deficits and an expansion of public sector debt to levels not seen since the second world war. And this time, this debt is not just confined to a few countries that paid for that war. This time every capitalist economy is taking on another mountain debt of that governments (and that means you and me) will owe to the banks and other financial institutions and through them to the pension funds and other savers.”
Recent weeks have revealed that the sovereign debt crisis, as it is called, has not gone away in the Eurozone. Indeed, it has intensified as lenders of the money to these weaker Eurozone governments have found that the likes of Greece, Portugal, Spain and Ireland, have not been able to reduce their borrowing requirements, despite slashing public services and social benefits, raising taxes and cutting government investment and infrastructure projects.
Because the capitalist private sector in most of these countries has failed to expand employment and investment, with the banks failing to lend to small businesses and big corporations hoarding their cash, governments have not been able to boost tax revenues. So, despite huge cuts in spending, budget deficits are only nudging slowly downwards. Greece actually raised its forecast for its budget deficit next year, while Portugal and Spain look like falling short of their targets.
So the lenders of cash to these governments, which are mainly European banks, are refusing to do so without the price of these bonds being slashed. Or another way of putting it, Eurozone governments are having to borrow at an 8-10% interest rate rather than 3% that the German government borrows at. The sheer cost of borrowing thus drives the deficit up higher. Balancing the government’s books become impossible.
It is made even worse in the case of Ireland where the greed and recklessness of the Irish banks, which grew in size to nine times the economy’s annual output, eventually led to their collapse and bankruptcy. Now the Irish government is having to bail out these banks at a cost now reaching 50% of annual output. The cost is so high because bank bond holders are being compensated in full. So the living standards of most Irish households is being reduced for years ahead.
So does this mean that several other European governments are going to go bust and default on their debts, leading to the breakup of the Eurozone and the end of the euro? As I said in May, I don’t think so. The euro project is still supported by Germany and France. Despite some growing opposition within Germany to bailing out these ‘profligate’ weaker capitalist economies, the majority of Germany’s political and financial elite want to continue the project as a ‘united Europe’ puts Germany and France on the world stage. So the Germans and the French will step up to the plate to finance further bailout packages until the crisis passes.
With the French, the Germans have set up a fund called the European Financial Stability Facility that can lend money to European governments in trouble for three years so that they don’t need to borrow at 10% from the private bond markets. Of course, these funds are lent under strict, even draconian conditions, that will drive down the living standards of the Greek and Irish people.
However, the crisis has continued and the current EFSF funding resources will be insufficient to bail out Portugal, Spain and even Italy (in that order). That is why there is talk of the breakup of the euro. So the Germans are going to have to agree to double or even triple the size of the fund size.
Longer term, the Germans are determined to force the weaker Eurozone countries into a fiscal straitjacket where the public sector of these countries can do little provide social benefits or public services and investment to expand their economies.
Most likely, within the next few days or weeks, such an increased in funding will be announced. How will the money be found? It is most likely to be printed by the European Central Bank. So there going to be a massive expansion in money supply across Europe. In Marx’s words, fictitious capital is going to be created to finance government borrowing, so that European banks and private pension funds do not lose money and go bankrupt themselves.
By propping up credit markets in this way, the strategists of European capital hope that economic growth will eventually return to allow this crisis to dissipate. So this is a short-term solution. It merely ‘kicks the can down the road’, as the Americans would say. Without a recovery in profitability of the productive sectors of European and US economies, the private sector will not renew investment and start rehiring workers currently in the ‘reserve army of labour’.
That recovery has started but it is still too weak to get capitalism going again to ensure sustainable growth that can reduce unemployment. Such is the weight of debt (fictitious capital) built up in the last credit-fuelled boom of 2002-07, the recovery from the Great Recession is going to be much slower than previous, less damaging capitalist economic slumps in the 1970s, 1980s and 1990s or 2001.
If this euro crisis is overcome, it will be because the unemployed, working households and small businesses will have saved the financial sector, big business and pro-capitalist governments by paying higher taxes, receiving less social benefits, taking cuts in wages and getting poorer public services.
The Irish bailout still means its public debt that will rise to 130% of GDP. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. Ireland will be transferring nearly 10% of its national income as reparations to the bondholders, year after painful year.
But none of that would be necessary with an alternative economic strategy. First, why should the shareholders and bondholders of these reckless banks in Ireland, Britain, the US, Spain etc have been bailed out? They took the risk in a ‘free market’ to invest. They should take the consequences of their actions if their investments go wrong.
If that means, that the banks become state-owned, that is all to the better for the taxpayer. They can then be used as a public service as part of a plan to help small businesses and households with credit, or for that matter to buy government bonds. That would make the banks useful and not ‘socially useless’ as they have been (see great piece by John Cassidy in the New Yorker magazine: http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy#ixzz16qoGmKPI
Also, not bailing out the bank bondholders would sharply reduce the burden on governments. But if governments burden of debt is still too great, they can default on their bonds and ask the bondholders (Europe’s banks) to take ‘haircuts’, just as the Argentine government did in 2002. Even the German leaders are posing such a solution for the Eurozone (but only after 2013 and of course, only with draconian ‘conditionalities’ on public spending). If Europe’s banks are then put in jeopardy, they could be taken into public ownership too.
In this way, the burden of debt would be removed from Europe’s economies. Such an approach would inevitably mean an encroachment on the private sector. It would mean an expansion of the public sector at the expense of private profit. That is why it is anathema to the powers that be. They want Eurozone governments to ‘honour’ all their obligations to the bondholders at the expense of the households of Europe. And they want to return state-owned banks to private ownership as quickly as possible, once the banks have been restored to health at the expense of public services and welfare benefits.
The euro will survive, at least this time, if the bailout funds are increased and the working people of Europe swallow the cost of that bailout. Whether the euro should survive is another question for another post.