- Created: Thursday, 09 October 2014 10:26
- Written by David Yaffe
In a document prepared for the 20-21 September 2014 meeting of the G20 group of finance ministers and central bank governors in Cairns, Australia, the IMF warned that global economic recovery from the 2008 crisis is precarious. Rising ‘geopolitical tensions’, excessive risk taking and the prospects of tighter monetary policy in the US pose new threats to what is already an unbalanced and weaker than expected recovery. The IMF pointed to lower growth rates in the developed capitalist and emerging economies, continuing high public and private debt and growing risks associated with low inflation despite the stimulative monetary policies in place for over five years. Escalating conflicts in Ukraine and the Middle East will further undermine prospects for the global economy. This is the context in which the growing economic crisis is reinforcing divisions within Europe. David Yaffe reports.
The ‘geopolitical tensions’ are not in any way separate from the global economic crisis that was precipitated by the imperialist banks in 2008, but are integral to it and a necessary component of it. The unending conflicts in the Middle East and more recently in Ukraine are concrete expressions of growing inter-imperialist rivalry over the spoils of a parasitic and decaying capitalist system. The US’s superpower status is being challenged as its failed and costly military interventions undermine both its geopolitical standing and its economic supremacy. The US-EU sponsored coup in Ukraine is an attempt to create a barrier between a newly assertive Russia and its principal trade partners in Europe, with the intention of ultimately breaking up the Russian Federation. The US actively pressurised Europe to impose punitive sanctions on Russia and the main European powers complied, urged on by Britain. The German government joined the offensive despite German business leaders pointing out that the US has much less to lose from sanctions than Germany. US companies account for 3.8% of Russia’s imports compared to the nearly 10% share of German companies. In addition Germany is very dependent on Russia’s Gazprom for its energy needs and is the single largest buyer of Russian natural gas. Russia responded with reciprocal sanctions, especially on agricultural goods, while it began establishing alternative trading partners. The immediate impact will be to exacerbate the long-term stagnation and chronic recession already engulfing the eurozone and particularly in the countries of southern Europe still deeply engulfed in a devastating economic and social crisis.1
Meanwhile austerity continues to devastate the lives of millions of working class people, while a small privileged minority in the dominant capitalist countries not only remains untouched by the financial crash but has continued to prosper throughout the six years of recession. According to the OECD, the number of long-term unemployed in the world’s major capitalist economies has increased by 85% since the financial crash in 2008. Almost 45 million people are without work in the OECD area (34 mainly developed capitalist economies), 11.9 million more than before the crisis. Over 16 million have been out of work for at least a year in the first quarter of 2014, compared to 8.7 million before the crisis. For millions more working class people, low-paid, insecure and temporary employment has become the predominant feature of their working lives. This development has led to a significant polarisation of political forces within those countries most affected by imposed austerity, giving rise to both mass popular resistance movements and right–wing neo-fascist reaction. In Scotland rejection of British ruling class imposed austerity was the driving force behind the remarkably dynamic ‘Yes’ campaign for Scottish independence.
Deepening crisis in the eurozone
In the second quarter of 2014 the eurozone’s recovery came to a halt. In the year to May 2014 eurozone prices grew by only 0.5%, well below the European Central Bank’s (ECB) target of just under 2%. This was the lowest level since Autumn 2009. Pressure built up on the ECB’s President Mario Draghi to take action against the growing threat of deflation. At the beginning of June the ECB became the first large central bank to cut its deposit rate below zero. The cut in the deposit rate from zero to -0.1% imposes a levy on banks’ ‘excess reserves’ parked at the ECB. It also cut its main refinancing rate from 0.25% to 0.15%. In addition the ECB unveiled a package of liquidity measures to encourage banks to lend to small and medium size businesses, allowing banks access of up to €400bn worth of cheap four-year loans. Short of full-scale quantitative easing (buying specified amounts of financial assets from commercial banks and other private institutions to increase liquidity) there is little more the ECB is able to do to halt what could turn into a dangerous deflationary spiral.
By July eurozone inflation had fallen to 0.4%. Eurozone GDP was stagnant with zero growth in the second quarter of 2014. Growth in Germany, the driving motor of the eurozone economy, contracted by 0.2%, as did that of Italy. French GDP was stagnant with no increase. Together the latter three countries make up two-thirds of eurozone GDP. The annual rate of growth in the eurozone fell from 0.9% in the first quarter to 0.7% in the second. The eurozone economy remains smaller than it was before the financial crisis in 2008. Joseph Stiglitz, the former chief economist of the World Bank, warns that the eurozone has begun to resemble Japan, which endured a decade-long struggle in the 1990s to eliminate deflation and stagnant economic growth.
Matters continue to deteriorate. In August the rate of inflation in the eurozone fell further to 0.3%. At the beginning of September Draghi surprised markets once again by cutting interest rates to another record low and pledging to buy hundreds of billions of euros of private sector bonds in a dramatic intervention to save the eurozone from economic stagnation. The main financing rate was further cut from 0.15% to 0.05% and the charge for banks parking excess reserves at the central bank increased to 0.2% from 0.1%. The euro has fallen over 5% against the dollar since the start of June when the ECB first cut its deposit rate to below zero.
The outlook for the eurozone is not promising. The escalating conflict with Russia is already having a seriously negative impact on eurozone economic growth. Divisions in the eurozone are beginning to widen. Germany has made it clear that it will not increase borrowing to boost public investment to aid a recovery in the eurozone. France has put off reaching its 3% deficit target for a further two years. Poland’s Finance Minister told the Financial Times (12 September 2014) that Europe should agree a fresh €700bn in spending over the next five years, warning that a continuation of austerity and loose monetary policy risks extending Europe’s decline for decades. This proposal will face strong opposition from Germany. Finally the ECB attempt to kick-start the stagnant eurozone economy got off to a very poor start when banks’ demand for the cheap four-year loans fell far short of expectations.
European Union and Britain
British Prime Minister David Cameron’s commitment in January 2013 to renegotiate the terms of Britain’s membership of the European Union (EU) and follow this with an in/out referendum on Britain’s membership in 2017 has backfired.2 Far from appeasing the eurosceptics in his party and outflanking the anti-EU United Kingdom Independence Party (UKIP), the eurosceptics have become ever more demanding and UKIP has strengthened its hand. Developments over this year show Cameron’s plan to reform the EU, and persuade British voters to stay in the EU, is in disarray.
In June Cameron was dealt a humiliating blow when his efforts to prevent Jean-Claude Juncker’s election as President of the European Commission (EC) were overwhelmingly defeated. The Prime Minister had warned that the choice of the veteran dealmaker and former Prime Minister of Luxembourg for the top European position could push Britain towards an EU exit. Angela Merkel, Germany’s Chancellor, admonished him for making ‘threats’. Cameron was left almost completely isolated as 26 of 28 countries in the EU endorsed Juncker’s election as head of the EC for the next five years.
In July, in yet another concession to his increasingly eurosceptic party, Cameron reshuffled his Cabinet in favour of those in the party wanting to reassert the sovereignty of Parliament over the European Court of Human Rights (ECtHR). He sacked three ministers who were resolutely opposed to the UK withdrawal from the European Convention on Human Rights, which the ECtHR enforces and which underpins English law. They included the Attorney General, Dominic Grieve. It was to little avail. At the end of August a leading Tory eurosceptic MP, Douglas Carswell, resigned from the Tory Party, defected to UKIP and triggered a by-election. Privately Cameron was told by hard line eurosceptics in his party that the Conservative Party will split after the 2015 General Election if he fails to renegotiate Britain’s EU membership terms to a common market-style trade deal (The Guardian 30 August 2014).
Cameron wants a less regulated (neo-liberal) Europe with protection of Britain’s rights in the single market as the eurozone bloc is developed and strengthened. Critical in this context is his determination to protect the parasitic and speculative activities of the City of London from European oversight and regulation. In this he will almost certainly fail. In January 2014 the European Court of Justice (ECJ) threw out Britain’s attempt to curb the power of the European Securities and Markets Authority to ban short selling. At the end of April Britain’s efforts to shield the City of London from EU rules suffered another blow when the ECJ rejected a UK legal challenge to eurozone plans for a tax on financial transactions. British banks are stepping up their opposition to the creation of EU finance directorate headed by an EU commissioner. Anthony Browne, head of the British Bankers’ Association says that such an arrangement could lead to regulation of the City’s interests in favour of the eurozone. Finally the City has recently expressed its concern about the loss of British influence in the European Commission with the number of British nationals employed in policy roles having fallen from 9.5% in 2004 to 5.3% in 2014, less than half the UK’s share of the EU population (Financial Times 4 August 2014).
With all these developments it is of little surprise that US banks are planning for a possible ‘Brexit’, Britain’s withdrawal from the EU, and are drawing up plans to move some London-based operations to Dublin. Most US and Asian banks choose to base their main European operations in the UK which gives them automatic access to all 28 countries in the EU. The UK hosts more than 250 foreign banks and last year the financial services industry, the largest net exporter of financial services in the world, generated a trade surplus of around $70bn. A third of that surplus came from trading with the EU. If Britain left the EU the City could end up as merely an offshore financial centre, leading to other European countries taking business away from the UK in what one executive from a US bank called ‘a competitive arms race’ (Financial Times 18 and 19 August 2014). Given the centrality of financial services to the UK economy this poses a serious threat to the British economy.
As we argued more than a year ago, Cameron gambled and lost. The day of reckoning is approaching. The day of decision for the British ruling class is coming ever closer. With Europe or with the United States? Whatever choice is forced on the ruling class, it is certain that any independent role for the City of London will be severely curtailed.
1. See James Petras ‘Obama Buggers Europe: Sanctions Deepen the Recession’ for useful statistics on these developments at petras.lahaine.org/?p=1999
2. See David Yaffe ‘Cameron fuels ruling class divisions on Europe’, FRFI 231 February/March 2013 tinyurl.com/bvb8m3h and ‘Tories self-destructing over Europe’, FRFI 233 June/July 2013 at tinyurl.com/ljrqo5q on our website.
Fight Racism! Fight Imperialism! 241 October/November 2014