Confronting the Sovereign Debt Crisis: Beyond the Cycle of Austerity and Debt


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The recently signed fiscal compact is another indication of the way in which the European sovereign debt crisis is being framed. The European politics class, social as much as Christian democrats, believe that the dramatic increase in the interest rates of a number of European countries and the deteriorating credit rating of core countries is the result of European states ‘living beyond their means’. Austerity is prescribed as the solution, immediately leading to a drop in GDP and hence tax revenue, which only reinforces the sovereign debt crisis. This dynamic has been blatantly obvious above all in Greece, which has become a kind of hyper-neoliberal chamber of horrors.

What our leaders don’t understand, and don’t want to understand, is that we have been witnessing speculative attacks on sovereign debt, i.e. a sovereign debt bubble. As the property bubble collapsed and related opportunities for investment in financial products disappeared, investors were looking for new places to stash their cash. These new places have included grain prices and oil and, last but not least, government bonds. The architecture of the European Union, in addition to the general deregulation of the financial system, has facilitated this development. The ECB, free of any democratic control, cannot issue public debt bonds nor can it buy the bonds of member states (except in exceptional circumstances). It can, however, lend to banks. The last years have seen banks enjoy repeated bailouts and easy-access to cheap credit from the ECB. The bailouts and cheap lending have been justified on the basis that liquidity is needed to get banks lending, which is in turn needed by the small businesses that provide most employment (no mention of the fact that in Ireland, to take one example, between 1999 and 2008 a whopping 75% of loans were property related). Instead of lending money for productive investment, however, banks have preferred to do other things – like speculate on the debt of the governments that are bailing them out. To take the Irish case again, in mid-2010 AIB and Bank of Ireland (both of which had soaked up billions via NAMA and recapitalization) were two of the top three banks in possession of Irish government bonds.

The objective of all this seems to be to maintain and enhance the massive concentration of wealth in the financial system by prioritizing creditors over and above the rest of society and, indeed, the economy. Yet it is precisely this massive concentration of wealth in the hands of banks and other financial institutions that makes governments, particularly in Europe’s periphery, so vulnerable to speculative attacks (more on these below).

The radical left, for its part, has also failed to address in any meaningful way the concentration of financial wealth. Apparently hypnotized by the workplace, home of the beloved workers struggles’ of yesteryear, left activists don’t seem to have noticed the gargantuan shifts in the accumulation of wealth that have characterized the last thirty years of capitalism. A few examples give a sense of the size of this shift. Black Rock, the largest financial agency in the world, holds financial assets with a value greater than the entire GDP of Germany. Allianz, the second biggest, has more than India’s GDP. Just twenty of the largest financial players have a combined wealth greater than the GDP of the USA, the largest economy in the world. All in all, the amount of money in the financial system is thought to be between four and seven times greater than global GDP (i.e. the total value of all goods and services in the world). Even industrial companies (notably the car industry) often make more money from financial activities than by actually making products. Conor McCabe, in Sins of the Father, gives one example here: in 1994 the multinational manufacturing company Proctor & Gamble lost $157 million on ‘over the counter derivates’, indicating just how much even manufacturing companies are involved in financial activities.

In short, the principal mode of accumulation of wealth is not the exploitation of the worker at the point of production (the work place), but the generalized expropriation of all social wealth by a parasitic financial system. The sovereign debt crisis is one, perhaps the most dangerous, of these forms. And yet the left have put forward virtually no concrete proposals in this regard (the Anglo: Not Our Debt campaign being a notable exception).

So what proposals might we put forward? Here I want to suggest a few which I hope will be debated and taken seriously by social movements. They are:

1.    Ban credit default swaps
2.    Ban short selling of sovereign debt
3.    Give the ECB the power to lend to member states (no strings attached)
4.    Regulate credit ratings agencies

1. Ban credit default swaps

In June 2010, Angela Merkel and Nicolas Sarkozy wrote a joint letter to Jose Barroso arguing that there is an “urgent need for the commission to speed up its work to establish stricter control of markets in sovereign credit default swaps and of short selling” (quoted in An Audit of Irish Debt)

But what are credit default swaps (CDS)? CDS are basically a form of insurance for a lender or bondholder. If a loan or bond is not paid back the lender or bondholder can use their CDS to cover their losses. But, and this is symptomatic of the insanity to which financial deregulation has led us, CDS can also be bought to cover an asset (bond or loan) which belongs to a third party. In other words, you can take out insurance on someone else’s lending risks. As the An Audit of Irish Debt notes, “in this case, it is more useful to think of the instrument as a bet that a borrower will not be able to meet their obligations”. By gambling on default risks CDS contribute to the spiraling costs of government lending.

2. Ban short-selling of government bonds

Short-selling means selling and then quickly re-buying an asset to make a fast profit. Typically an investor will sell a given asset and then, as the price falls, buy it back at a lower price: “Aggressive short selling can manipulate a market and depress the value of an asset, a sort of self-fulfilling prophecy”, to quote An Audit of Irish Debt once more. When this kind of unregulated activity is combined with enormous concentrations of wealth it is easy to imagine how a single large investor can manipulate the costs of government borrowing and hence the lives of millions of people. Germany has already banned naked short-selling of government bonds.

3. ECB government lending

Member states in the European Union cannot borrow from the European Central Bank. This is in contrast to other countries, such as the US, in which the government can borrow from its own central bank. For example, because the Irish government cannot borrow from the ECB we are completely dependent on speculators for finance, making Ireland and other European countries, and in fact the Eurozone in general, extremely vulnerable to speculative attacks. Although there has been much discussion of this, the consensus among the European political class seems to be that the ECB cannot be reformed without ‘fiscal union’, which in practice means without giving austerity measures a quasi-constitutional status. The argument here is essentially racist; if the likes of the feckless Irish or the lazy Greeks can get their hands on ECB money they’ll spend it all in a week. Hence, guarantees of fiscal restraint are deemed to be required. However, the consensus on this issue is a shaky one as the vulnerability of peripheral member states risks bringing down the entire European project. In opposition to the chauvinistic and suicidal arguments against ECB lending to member states, social movements should argue in the strongest possible terms that we will stand together to take every measure to defend ourselves against speculative attacks and that destroying the power of finance, rather than enforcing public spending cut backs, is the priority.

4. Credit rating agencies

The rating agencies came about to provide clarity and information to investors about the quality of financial investments. This includes evaluating the foreseeable risk and profitability of government bonds. A change in the credit rating of a country can have cataclysmic effects, as we have seen. Yet the rating agencies are unregulated, untransparent and free of any democratic control. To make matters worse, just three companies (Standard’s and Poor, Moody’s and Fitch) have a monopoly, granting them immense power. In terms of how accurate these companies are, we need only consider that they gave the likes of Lehmans Brothers and Enron top ratings right up to their collapse. The Financial Crisis Inquiry Commission Report, 2011 singled out the reliance on credit rating agencies as a key factor in the financial bubble that ended in 2008, arguing that: “major firms and investors blindly relied on credit rating agencies as their arbiters of risk”. It should be clear, then, that the power of these agencies needs to be curtailed via some form of regulation.


The above are just some potential reforms which might serve as useful points of discussion for social movements. More broadly, however, it seems that what some analysts call ‘political default’ will be needed. The notion of the ‘political default’ refers to non-payment of illegitimate debt as an explicit act of resistance designed to destroy the concentration of wealth in the financial system and the political blackmail of the speculators. ‘It’s not our debt’ and ‘we won’t pay’ are slogans which are brave enough to contemplate a confrontation with the financial superpowers. Political default should refer to both individual/family debt and government debt. By pulling the rug on debt we will undermine the central plank of the financial system. It is today’s equivalent of the strike in that it immediately blocks the expropriation of collective wealth. However, let’s not kid ourselves (as the opportunistic left wing parties so often do) about the effects of such an action. The forthcoming Crisis and Revolution in Europe, an essential manifesto against financial capitalism, describes these effects as follows:

Generalized default – from families to the state – would accelerate the banking crisis….It would surely set in motion a series of bankruptcies while at the same time undermining private credit and the traditional ways in which state’s have financed themselves (C&R, 134)

Despite these challenges, the inequalities and contradictions of financial capitalism, and the increasingly authoritarian forms of state power needed to support it, make it vital to free ourselves from dependency on the banking and financial system, which may in turn require developing more sustainable forms of credit. Continuing to ignore the financial system is not an option, if we do so we condemn ourselves to irrelevance. The alternative put forward by the left parties (ULA and Sinn Fein) is essentially a national Keynesian type approach. This involves leaving the EU and the euro and using our regained fiscal sovereignty to tax wealth on a national level and stimulate employment via government spending. Political independence and national sovereignty do not protect nations from capital at an international level, as is well known. Of all people, a post-colonial society such as Ireland should realize this. As Crisis and Revolution puts it, in the context of the European social movements:

Even if the 15-M movement or that of the Greek squares had the force to challenge the alliance between governments and financial oligarchies in their respective counties, or to impose a unilateral default on their states, they could not achieve a viable and economic alternative in their own country. The punishment inflicted by the financial markets against those countries would escalate, beginning with a flight of capital, followed by the closure of all channels of state finance and finishing with an exit from the euro and a dramatic economic crash. (C&R, 143)

Moreover, national level taxation of wealth, while a good idea in itself, misses the huge concentrations of wealth in the financial system. Why not a tax on financial transactions? Why not taxation of the market in over the counter derivatives?

The dramatic shifts in the way wealth is accumulated, the expansion of the financial system and the subservience of the political class to the interests of a few creditors over and above the population of Europe and, indeed, other sectors of the economy are game-changing developments for social movements. Workplace struggles are vital, as are struggles against the household tax (and all regressive taxation), privatizations and welfare cuts.

But if these fundamental struggles are pursued without addressing the financial system, the principal form of accumulation in contemporary capitalism, then a fundamental piece of the puzzle will be missing. The mushrooming movements across Europe, particularly in Spain and Greece, point towards the possibility of a Europe-wide movement against debt and financial capitalism. They point towards the increasingly real possibility of social movements across Europe advancing concrete demands and achieving them. The struggle against debt, in particular, may well be the 21st century equivalent of the 20th century’s struggle for wage increases and public services. In other words, it may well be the front line of the struggle against capital’s expropriation of collective wealth.

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2 Responses

  1. Gavin Gleason

    March 21, 2012 12:48 pm

    “The radical left, for its part, has also failed to address in any meaningful way the concentration of financial wealth. Apparently hypnotized by the workplace, home of the beloved workers struggles’ of yesteryear, left activists don’t seem to have noticed the gargantuan shifts in the accumulation of wealth that have characterized the last thirty years of capitalism.”

    Firstly, there is nothing particularly peculiar about this situation historically. Marx described in some detail the importance of the state bailouts in France of the financiers already in 1848. Neither has there been any lack of talk about the huge financial bailouts on the left of recent. This idea that the radical left is not on top of new developments in finance seems totally bizarre.

    I think the dismissal of the workplace really zeros in on the problem. You have a few reforms that you think might take the edge off of accumulation. It’s possible that they would, but who would enforce them? How are you going to implement these changes?

    The focus on workplace power in the past is because the unions and the workplace have been bases of real working class power by which concessions such as the ones you propose could be enacted.

    Now, it’s possible that the union power has eroded to the extent that they are no longer able to play the role they once did. I’d be somewhat sympathetic to that argument as there is plenty of evidence of such an erosion. However, you’ve not substituted any real power in its place. You’ve merely put up a Keynesian wish list with no possible route by which to obtain it at the same time that you denigrate the rest of the left for their apparent foolishness.

    Give me a sign that you have some strategic vision of how such reforms could be foist upon a ruling class who clearly doesn’t want them and I’ll take the whole critique a bit more seriously.

  2. Mick

    March 21, 2012 5:14 pm

    Thanks for your comments. The article wasn’t meant to be a blue print for revolution, I was trying to make an intervention into an important area for discussion and action. Do the proposals listed above amount to a glorious revolution? No. Nevertheless, practical proposals can sometimes have greater political potential then revolutionary master plans.

    On the issue of who would force such an agenda on the state/EU. I conclude by saying:

    “The mushrooming movements across Europe, particularly in Spain and Greece, point towards the possibility of a Europe-wide movement against debt and financial capitalism. They point towards the increasingly real possibility of social movements across Europe advancing concrete demands and achieving them.”

    So that’s the answer, networked horizontally-organised movements composed of a variety of social subjects and cooperating on a transnational level. Is this likely to happen? No. But the organized working class aren’t up to much either.

    Last but not least, the bit about the ‘beloved workers struggles of yesteryear’ was a bit tongue-in-cheek, but when people practically wet themslves over the Vita-Cortex occupation you can see where I’m coming from. Work place struggles are great, and I say as much in the conclusion, but there’s more to production than men with full time contracts in organised workplaces.

    To return to the real issue of the original article, do you think the proposals should be adopted by social movements, for example in the hypothetical situation that ODS wasn’t a fiasco?