Eurozone Crisis: What Next?

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Recently engaged in a round of backslapping, the leaders of Europe suggested that we were turning the corner out of the crisis. In Ireland despite all the evidence to the contrary, the government is still trying to talk up the prospect of a ‘deal’ on the bank debt. But on the ground, the crisis is worsening, austerity is destroying people’s lives and the economies of Europe. In the first of two articles on the future of the EU, Paul Murphy MEP examines the immediate prospects for the eurozone crisis in the next months.

Once more, the markets were temporarily calmed in September. The road forward to a stable eurozone was pronounced to be nearer than ever. The relatively tranquil summer for the eurozone  was followed by a series of declared victories – the new European Central Bank (ECB) bond-buying programme; the German constitutional court positive ruling on the European Stability Mechanism; the announcement of the European Commission’s proposal for common supervision of Europe’s banks by the ECB; and the victory of the Liberals and Social-Democrats in the Dutch elections, despite the earlier good showing for the Socialist Party. The bond yields for the crisis-ridden states fell to relative lows and Commission President Barroso took the opportunity to spell out a longer-term vision of a move to a “federation of nation states” in Europe.

That this was simply the calm before the unleashing of a mighty storm of crisis in autumn and winter across Europe has already become evident. The measures announced represent new sticking plasters on the crisis. Yet again, the fundamental contradictions facing the eurozone have not been addressed. A series of deep crises in different states are likely to emerge in the coming weeks and months, putting into question the continued existence of the eurozone as is once more.

Divisions within capitalist classes deepen

Behind the scenes, the divisions between different capitalist classes and within different capitalist classes in Europe are deepening. The debate has, in general, moved on from a discussion about the prospects of Greece remaining in the eurozone. There now appears to be widespread agreement that it cannot – and it is simply a question of managing Greece’s exit. Instead, the debate is now whether contagion of a Greek exit to the other ‘peripheral’ states, and in particular Spain and Italy, can be avoided.

This debate has even entered the leading capitalist class in Europe – that of Germany, where it is expressed in the open disagreement between Chancellor Merkel and President of the German Bundesbank, Alex Weidmann. Weidmann was the only ECB Governing Council member to vote against the latest ECB bond-buying plan, a measure which Merkel welcomed. According to economist Nouriel Roubini (Europe Trip Report: Policy Makers’ Next Moves Could Make or Break the Union):

 “The rift between the German political authorities and the country’s central bank goes deeper than has been revealed in public. German policy makers believe that the Bundesbank is actively trying to boycott any attempt to rescue the EZ; in private, they are scathing about the stance taken by Weidmann, explicitly hoping for his resignation.”

This seemingly personal disagreement reflects the deep disagreement amongst the capitalist class. Weidmann represents the wing which considers the peripheral states to be effectively lost and therefore not worth gambling the monetary reputation of the German Bundesbank and the finances of the German state on. On the other hand, Merkel and those around her, are convinced of the need to try to build such a ‘firewall’ as to prevent contagion to Spain and Italy. They represent the majority of big business within Germany that has identified that it is in Germany capitalism’s interest for the euro to survive. With the break-up of the eurozone, they would face the twin problems of a significantly strengthened deutschmark, which would hit German exports competititivity hard, together with a deepened crisis in the rest of eurozone, thus significantly diminishing the market for German exports.

While Merkel currently has the upper hand and has therefore welcomed the latest ECB announcement, the situation is inherently unstable and she is constrained by the disagreement and in particular the planned elections in September 2013. Weidmann and the sceptics within the German capitalist class are working hard to make clear their fundamental disagreement with the policies of the ECB, with Weidmann arguing that Goethe’s Faust highlighted

“the core problem of today’s paper money-based monetary policy” and the “potentially dangerous correlation of paper money creation, state financing and inflation.”

Merkel’s room for manoeuvre to agree to further aggressive moves by the ECB or other institutions is extremely constrained and she may even face pressure to pull back from decisions already reached, as has been indicated in the shifting sands regarding the tentative agreement relating to Irish bank debt.

European Stability Mechanism

The chosen vehicle to create this firewall to protect Spain and Italy from the markets has been the establishment of the European Stability Mechanism (ESM), which is a permanent mechanism to replace the temporary European Financial Stability Facility (EFSF). This is a €500 billion fund, with the capacity to ‘bail out’ banks directly and states under conditions of ‘strict conditionality’, in other words, a ‘Memorandum of Understanding’, savage austerity and in reality fiscal powers being ceded to the ESM. The ESM represents a significant further attack on democratic rights and another step in the institutionalisation of austerity.

The theory behind the ESM was to create a fund so big that the markets would not ‘attack’ other peripheral states in the aftermath of a Greek euro exit, because the ESM would have the ability to bail-out the state. This was extended by a decision in June to theoretically allow the ESM to intervene directly to bail out banks (without passing the money first to the governments), however, this was subject to the establishment of a European banking regulator. It has also been extended with a decision to allow the ESM to buy up government bonds on the ‘primary market’ i.e. directly from the government, thereby keeping bond rates low.

The problem, however, with such a mechanism is the tricky question that has dogged all of the attempts to resolve this eurozone crisis – who is going to pay? The governments of Europe are committed to ensuring that the bondholders themselves do not pay through the cancellation or repudiation of debts. But the governments of northern Europe, led by Germany, also have a definite limit to the extent that they are willing to foot the bill. That is why the ESM only has access to €500 billion.

However, the immediate problem they face is that this is simply not enough. €100 billion has already been pledged to the Spanish banks, which leaves only €400 billion. That compares to a total government debt of €10.3 trillion of Spain and Italy and a total private debt of €10.8 trillion! (Roubini Global Economics, Is There an EZ Way to Leverage the ESM? Nein!)

This is a real problem facing the strategists of capitalism in Europe and one they have tried to get around through various schemes of ‘leveraging’ the ESM funds. So far, these have all floundered on legal and political objections, fundamentally because unless what happens is simply an accountancy trick, if the ESM is to have more funds, governments will have to pay more money!

The ruling of the German Constitutional Court which gives a conditional thumbs up to the ESM is not hugely significant, given that this outcome was widely expected. It has also placed certain limits on the German government’s liability to the ESM – of €190 billion unless the German Bundestag was to agree to increase this limit. This further restricts the possibilities for increasing the size of the ESM.

This means that as the clock ticks towards Greek exit, the political establishments of Europe have not yet built a credible firewall to prevent contagion.

ECB’s ‘Outright Monetary Transactions’ programme

This is the backdrop to the recent decision of the European Central Bank to launch its ‘Outright Monetary Transactions’ programme. Previously, Chancellor Merkel has expressed her opposition to such a scheme. Her mind appears to have been changed by the need for a firewall and the difficulties with increasing the ESM’s funding. Her change of mind and the more hawkish (relative to former Governor, Jean-Claude Trichet) ECB governor, Mario Draghi, made this OMT programme possible.

The OMT programme is a scheme by which the European Central Bank would buy up an unlimited amount of short-term bonds (up to three years) on the secondary market from peripheral states. The ECB has said that these bond purchases will be ‘sterilised’, in other words, no extra cash will be placed onto the market as a result. In this way, it would act as a sort of unofficial leverage to the ESM and act, in theory, to keep bond rates low for peripheral economies. The markets welcomed both the expectation of this deal and the deal itself, with the result that short and long-term bond yields have dropped by about 2% for both Spain and Italy.

However, there is an important catch for this programme to be triggered – states have to sign up to a bailout programme with either the EFSF or the ESM – in other words a programme of severe austerity to be monitored and assessed by the ESM/EFSF. This condition means that instead of the OMT programme being a solution to the crisis, it can prove to be a catalyst for its worsening. That is for three reasons.

Firstly, the markets have given a warm welcome to this programme and Spain and Italy have been able to benefit from lower bond yields, despite not being in an ESM or EFSF programme. This will not last – they will not be able to ‘free-ride’ on the anticipation of this programme forever. Within a short space of time, probably months at most for Spain, it will be forced into a programme, despite the political damage this will do to Prime Minister Rajoy and the opposition of Chancellor Merkel for domestic political reasons. Draghi added to the pressure for this on 4 October, declaring: “We are ready and we have a fully effective backstop mechanism in place. Now it’s really in the hands of governments.” (Financial Times 5 October 2012) The worsened austerity demanded will damage the economy even further, pushing it into a sharper downward spiral.

Secondly, in theory, conditionality is an ongoing process. It is not as straightforward as a country simply signing up to the ESM/EFSF – what happens if a country signs up, but does not meet the austerity targets set for it? For the ESM/EFSF, that is simple, funding can be threatened to be withheld to place extra pressure on governments, as has happened with Greece. However, for the ECB, if it is engaged in a OMT operation, it is more complicated. In theory, it should stop the operation if a country is not meeting its targets. However, doing that would resulting in a crisis in the financial markets – with bond rates shooting up to record highs for the country affected, but also crucially, spreading the crisis to the other peripheral countries. On the other hand, not withdrawing the OMT in such a case would simply result in the private bond-holders simply ditching all of their bonds onto the ECB, with the ECB being left with unsellable bonds that are unlikely to be paid!

Lastly, even if the programme is implemented aggressively, it offers a purely stopgap solution. Like so often in this crisis, a crisis of insolvency is being treated as a crisis of liquidity. Having access to funds on the market by lowering bond yields may inch states closer to solvency by reducing the burden of servicing national debt. However, for countries that face unsustainable levels of debt,  it does not make them solvent. The austerity imposed will worsen the crisis.

Balkanization of banking system

One of the symptoms of the deepening crisis in the eurozone is the fact that ‘monetary union’ in some respects is falling apart. There has been a ‘Balkanization’ of the banking system, with money fleeing from the peripheral countries. Between the first quarter of 2008 and the first quarter of 2012, €301.8 billion and €203.9 billion has fled back into German and French banks respectively, from the five PIIGS countries. Ireland, for example has seen €81.7 return to German banks and €37.7 billion return to French banks. (Financial Times 4 September 2012)

There has been a dramatic divergence in borrowing costs across the eurozone, despite the ECB setting the interest rates for the zone as a whole.  According to the Financial Times (4 September 2012):

“In November 2009, the yield on a Greek 10-year bond was less than 2 percentage points higher than on the German equivalent. It is now 22 percentage points.” This also applies to private borrowing. According to the same article, a “company borrowing less than €1m for up to five years can expect to pay an interest rate of 6.5 per cent in Spain, but just 4 per cent in Germany.”

This is an unsustainable situation and one which recent moves of the European Council and Commission are an attempt to address. One of the measures announced at the June summit of the European Council was the need to move to a ‘Banking Union’. This was made more concrete by the launch of the European Commission’s plan at the start of September for a Europe-wide banking regulator. However, a banking regulator is only one part of a true ‘banking union’, which would involve, a common regulator, common rules and a common deposit insurance scheme. It is the common deposit insurance in particular that would go some way to counter-acting the Balkanization of the banking system.

However, here the problem yet again is that the core capitalist classes do not want to pool any debt, which in effect is what a common deposit insurance scheme would do. It is significant that the European Commission had planned to publish a detailed road map to the establishment of such a scheme, but had to shelve it at the last moment because of the objections of the German government. (Financial Times 14 September 2012) Instead, the much more limited Commission proposal would only see the ECB setting up a supervisory board. Tensions and disagreements remain on how many banks should be covered by this regulator, with the German government arguing that only a very limited number of the most systemic banks that pose European-wide dangers should be covered, to avoid the important Landesbanks in Germany coming under the supervision of this new authority.

The deal that wasn’t

The government, generously aided and abetted by the media, portrayed June’s European summit agreement as a “seismic shift” on Ireland’s bank debt, in the words of Taoiseach Enda Kenny. This was always a massive overstatement. The summit conclusions included an agreement “to examine the situation of the Irish financial sector”. This was related to an agreement that banks could be recapitalised directly by the ESM on condition that a common banking supervisor was established.

However, not only was this statement massively oversold by the government, but no sooner than it was signed, it began to unravel. The moves towards banking union are considerably less than what many envisaged, thanks to the opposition of the German government. The recent joint statement by German, Dutch and Finance Finance Ministers indicated their very clear position that “legacy assets should be the responsibility of national authorities”, i.e. that the €65 billion in banking debt dumped onto the shoulders of Irish taxpayers should stay there.

As a result, it seems most likely that there will be no deal done on this debt. The most probable scenario is that the government simply restructures the Anglo Irish promissory note, lengthening the terms of repayment, possibly pretending that this represents a ‘deal’ in order to save face. It should be clear that no agreement at European level is going to tackle the unsustainable nature of Ireland’s debt.

Worsening economy and working class resistance

While crisis management goes on at the top, the problem facing capitalism in Europe is that the crisis in the real economy is worsening. As a result of the austerity imposed and the worldwide double-dip that is unfolding, including a significant slowdown in the Chinese economy, the EU is heading back for recession, with eurozone GDP shrinking by 0.2% in the second quarter of 2012 after 0% growth in the first quarter. Significantly, Germany, which had been the driver of growth in Europe now faces recession in the second half of 2012 according to the OECD.

The other big factor standing in their way is the working classes of Europe. For the first time in this crisis, the Troika now faces active mass resistance simultaneously in three countries. The Greek general strike on 26 September, which saw over 100,000 protesting in Athens and tens of thousands in other towns and cities across Greece, marked the redevelopment of the militant struggle of Greek workers against austerity after the summer.

Portuguese workers have now joined the front line of the struggle against austerity, with the biggest demonstration since the Portuguese revolution in 1974, with up to one million people protesting in Lisbon, and hundreds of thousands elsewhere. Significantly, this forced the government to retreat from its proposal to increase workers’ social security contributions from 11% to 18% and decrease employer’s contributions from 23.75% to 18%. The government has now returned to the offensive, announcing massive tax increases to take the place of this proposal. In response, a general strike has been called on 14 November by the CGTP (union confederation), unfortunately after the budget is due to be passed.

Since the march of the Asturian miners on Madrid in July, the Spanish working class has also been to the fore of the fightback across Europe. Waves of protests have rocked Spanish society, with up to a million demonstrating in Madrid on 15 September and protesters surrounding the Parliament.

The movements in Greece, Portugal and Spain are such that the governments may be brought down. France, although not at the same level, has also seen a significant mobilisation, with close to one million demonstrating against austerity and the Austerity Treaty on 30 September.  Rumours of a Greek or Italian ‘solution’, i.e. the imposition of technocrats already circulate in Portugal. They illustrate the real problem that the European capitalist classes face in trying to force through further hated austerity measures. It is simply not feasible that the current Greek government will be able to continue for the next two years as it plans to. It is likely to fall under the pressure of the mass movements, which can precipitate a further general election. This is the likely context for the exit of Greece from the eurozone. Then this further crisis, far from being overcome, is likely to quickly spread, initially into the other ‘peripheral’ countries.

With the presence of such major movements in three of the five so-called PIIGS countries and with the pace of attacks continuing, the objective need for, and possibility of, a united response by working people across Europe is clear. Together with actively organising resistance in each of the affected countries, socialists should be agitating for and popularising the idea of common industrial action across a number of ‘peripheral’ economies. Even if a one day general strike was to happen in Greece, Portugal and Spain simultaneously, it would send a powerful message of resistance to the European establishments and give confidence to workers that they were not alone. It could provide the basis for building towards more generalised industrial action against austerity across Europe.

Socialist policies needed

A variety of capitalist policies have been implemented since the crisis struck in 2007 in order to stave off the prospect of a break-up or radical restructuring of the eurozone. At most, they have managed to delay the inevitable. The inability to tackle the central question of unsustainable debt has been a consistent feature. Unwilling to challenge the interests of finance capital, the bankers and speculators who would be hurt by a debt write-down, they have only countenanced some form of ‘debt mutualisation’ across Europe. Here, they have come up against the fundamental contradiction in the process of capitalist integration in Europe – the continued existence of separate capitalist classes who are extremely wary about ‘bailing out’ the others.

The other major problem, which goes not only untackled, but undiscussed in the mainstream media is the collapse of investment in Europe. Aggregate demand has in general collapsed across the continent, as consumer spending and public investment drop as a result of the austerity policies being implemented. Private sector investment has not only not made up for the slack, but has dropped dramatically. According to the Economist in mid-2010, “business investment is as low as it has ever been as a share of GDP.”

This has continued since. (See David McNally, “Slump, Austerity and Resistance” in The Crisis and the Left Merlin Press, 2011) This coincides with a rise of profits across Europe and therefore an unprecedented hoarding of wealth – now exceeding €3 trillion in the EU (Financial Times Lex Column 21 March 2012). This is because of the widespread existence of excess capacity and an absence of confidence of capitalism in future profitability, given the depth of the crisis and the prospect of a break-up or radical restructuring of the eurozone. It also points to the fundamental irrationality of the capitalist system, which can see €3 trillion hoarded, at the same time that 25 million workers across the EU sit in enforced idleness.

Capitalism offers only misery and continued crisis across Europe. A breakup of the eurozone on the basis of the continuation of capitalism would not offer a way out, but would simply mark a new stage of the crisis. As Europe as a whole goes back into recession, it is clear that the best that capitalism has to offer is a decade or more of austerity and decline in living standards. It is vital in this context that the Left energetically uses the crisis to demonstrate the roots of this crisis, the inability of capitalism to resolve it except on the bones of working class people and crucially puts forward and popularises a bold socialist alternative.

The outlines of such an alternative mean the repudiation of the unsustainable levels of debt in the peripheral countries;  using the massive hoarded wealth of major corporations and the rich to finance public investment on a national and European scale to create jobs; nationalisation of the major finance institutions and banks, turning them into democratically controlled public utilities to provide affordable credit to working people and small businesses; nationalisation of the key sectors of the economy under democratic workers’ control in order to be able to plan the economy for people’s need not profit; on that basis, the construction of a democratic plan, on a national and European level to ensure the balanced and sustainable development of the economies of Europe and the overcoming of the historic weaknesses of the ‘peripheral’ states.

 

 

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Paul Murphy is the the Socialist Party and United Left Alliance MEP for Dublin. For more see paulmurphymep.eu