In several posts in 2010, I argued that the people of Europe were going to have to pay for the bailout of the banking system in the Europe through a significant reduction in their living standards (by higher taxation and inflation, lower incomes, rising unemployment and reduced public services.
It started with the Greeks (see my post, Greek countdown, 1 February 2010). The socialist government there agreed to take a E110bn in loans from the European Union and IMF to fund the buyback of its maturing government bonds and future government borrowing. It had to do so because capitalist bond investors (who are mainly Greek and European banks and pension funds) were refusing to buy any more Greek government debt unless the prices they paid were slashed. In other words, the government would have to pay an 8-10% interest rate on their borrowing, a level that was just way too much forcing the government to borrow even more to pay for it!
Under the bailout, the Greeks were now able to fund their repayments to the banks, insurance companies and pension funds of Europe by using the loans from the EU-IMF. So the financial institutions got their pound (kilo) of flesh. But of course, this bailout was at a heavy price to the Greek people. The Greek government agreed to slash public services, raise taxation and sack tens of thousands of public sector workers. The jobless number in Greece has now hit 14.8% and youth unemployment has rocketed to 39%! Graduate unemployment is at 70%.
Then it was the turn of the Irish (see my post, Irish eyes are no longer smiling, 25 November 2010). In December, the outgoing government was forced to accept an EU-IMF package of E85bn to cover their government borrowing and to further bail out the Irish banks. The reckless borrowing of the Irish financial sector which had led to the banks growing to nine times the size of the Irish economy, nearly as much as the corrupt Icelandic banks. In both islands, these banks, with the corrupt connivance of their politicians brought their economies to their knees.
The Irish banks received E46bn in new capital from the taxpayer (equivalent to one-third of annual Irish output). But it has not proved to be enough. It now seems that the banks will need another E35bn shortly, taking the bailout up to the equivalent of 60% of Ireland’s GNP. The government debt level as a result will reach 140% of GNP. This is so high that, as usual, investors in Irish government bonds want interest on these loans at over 10% a year to cover their risk. That is so high that as fast as Ireland’s economy grows, all the extra income is sucked away in paying interest to the banks and other financial institutions that have just been bailed out!
So the Irish people now have a 17% unemployment rate, a 10% cut in public sector jobs, massive reductions in services, increased charges for health and education; and significant and permanent impairments of pension entitlements. It’s the same story as in Greece. The people who are paying for Ireland’s banking mess are not the bankers, but the very people who suffered from it. Such is the logic of capitalism: socialism for the rich and capitalism for the poor.
On 24 March, the political leaders of Europe will meet to agree on a permanent plan for dealing with the debt crisis caused by the banking collapse and the ensuing Great Recession. Their plan, as drawn up by the Germans and French, is that there must be no default on paying back the loans from the banks of Europe. And to make sure there are no defaults in the future, European governments are being asked to sign up to a commitment to balance their budgets, drive down their debt levels, ‘increase competitiveness’ through measures to privatise their publicly-owned assets and to ‘liberalise’ their economies.
The Greeks, for example, have had to agree to sell off public assets worth E50bn including Hellenic Post, Hellenic Railways, Athens Public Gas, the Pireaus port authority, Athens airport, Thessaloniki water, and ATEbank, to name but a few. The Greek people are being told to sell off their best publicly-owned assets at ‘fire sale’ prices to meet the demands of the bankers and Europe’s capitalist politicians.
The question posed in this post, as in previous ones, is why should the people of Europe (the Greeks, the Irish, perhaps soon the Portuguese, along with all those in other countries where ‘fiscal austerity’ is being applied in doses) pay for the failure of the banking system and the ensuing crisis in capitalist production? Those who lent money to the governments of Europe got paid handsomely for it – the returns of bond investment over the last 25 years have been even better than investing in the stock market.
But those profits are supposed to be payment for taking risks. Now when things go wrong, the banks still want to be paid in full. The argument is that if the debts of the Greek and irish governments and their banks are not honoured, then other European banks will go bust and other European governments will have to bail them out in their own debt crises. The whole European thing could implode.
But this argument is bogus. It is based on the premise that banking should continue on the basis of making speculative profits out of investing in bonds, stocks and other ‘financial weapons of mass destruction’ (as multibillionaire investor Warren Buffett has called it) rather than as a service to the public by providing credit to small businesses and householders. It is also based on the premise that the capitalist economy – production for profit – must survive at all costs.
There is an alternative. The debts of the distressed governments and their banks are no longer affordable. So the bondholders will have to accept a default on their loans. If that puts them in trouble, they should be taken over by their governments and run as public services financed by the taxpayer. It is ludicrous that the banks should be restored as going profitable capitalist concerns at the expense of people’s incomes, jobs and livelihoods.
And there is no reason to do so. Instead of Europe’s leaders agreeing to a programme of fiscal austerity, privatisation, lower pensions and longer working lives, they should be agreeing to public ownership of the banks and a Europe-wide plan of using those banking resources to restore economic growth through public investment. Fat chance!
What would worry the leaders of European capitalism who meet on 24 March would be the development of what they like to call ‘fiscal fatigue’. In other words, sufficiently large numbers of people, Middle East-style, refuse to allow the imposition of cuts or pay higher charges and taxes to sort the banking mess. If political movements develop to force the Greek, Irish or Portuguese governments to oppose the EU austerity plan, then it could be stopped in its tracks.
Unfortunately, so far, the Greeks and Portuguese continue to rely on so-called socialist leaders who are bent on meeting EU demands, while the Irish people have just elected a right-wing government backed by Irish Labour, having thrown out the previous right-wing government that presided over the mess.