Photo: Greece – teachers march against the education cuts.
For 18 months panic has spread among international financiers as losses on their loans to Greece proved inevitable. For them, forcing Greece, Ireland and Portugal to hand over state property, cut wages and raise taxes to retrieve their capital and interest was fine, but suffering losses on Greek government debt was not. The threat of irretrievable private capital losses has created sharp disputes between the European imperialist states. A last-minute compromise at the 21 July emergency eurozone summit in Brussels has only just staved off a collapse of the eurozone. James Martin reports.
Since late 2008, there has been a struggle between the key eurozone powers – France and Germany – over the best way of saving their investments, conserving the eurozone and the European Union itself. The British financial system is also threatened if the indebted countries default. On 20 July Chancellor George Osborne demanded that the eurozone members ‘get a grip’. Spain and Italy were now in the speculators’ firing line.
The debt crisis
The deep political and economic crisis that surfaced internationally in 2007 seemed to be only a ‘banking’ or ‘credit’ crisis. Up to now it has cost $20 trillion worldwide to plug some of the financial holes, but this was just the beginning. The crisis revealed an underlying stagnation in capital accumulation. The huge state debts run up to save the banks have now precipitated a ‘sovereign debt crisis’. It is most severe in the smaller eurozone states with weaker banks, whose ruling groups borrowed relatively huge sums at low euro interest rates.
In Ireland, bank debt is the chief concern, but state debts are heading for 100% of GDP this year, excluding the state’s bank shareholdings. Portugal’s banks face serious threats and the state debt, at 93% of GDP, continues to rise. In Greece, state debt is the central concern. It was 143% of its GDP in 2010 (eurozone average 85.3%), 158% now and rising to 170% in 2012. This July it had to pay private investors 26.65% a year on two-year loans. This is unsustainable. These countries now rely on other European states to keep paying their bills. Every basic rule in the European Monetary System’s founding documents has been broken to support them.
Nor does it stop with these three countries. In Italy, the ratio of state debt to GDP was 118% last year, and is rising. In Spain, property speculation has meant that banks struggle to refinance their own debts despite a lower debt to GDP ratio of 63.4%. Rumours surround Belgium’s position; its state debt to GDP ratio was 98.6% in 2010. The huge debt problems threaten the value and stability of the euro itself. Every state in Europe is attacking its working class to secure the vast sums of interest that must be paid to highly profitable global finance corporations.
The latest deal
The 21 July Brussels agreement has been forced on creditors. They have accepted the minimum steps necessary to save the euro. Greece will be managed from Brussels. €109bn is to be used by 2019 to roll Greek debts over longer periods (15-30 years) at lower interest rates (3.5%). €50bn will be provided by private, particularly Greek, banks. Of this, some €12.6bn will be written off. This is a selective default. US ratings agencies have been warned off announcing the risky truths of the situation. Ireland and Portugal will be charged the lower interest rates too.
The European Central Bank’s (ECB) Greek financing role will be displaced by the European Financial Stability Facility (EFSF), set up in a panic last year. This is a big expansion of the EFSF’s role as toxic debt manager – it is now a latent European Monetary Fund. A new eurozone economic government is foreseen. Although Britain is not centrally involved, the move is being encouraged by Osborne. A Common Consolidated Corporation Tax Base Directive – aimed explicitly at Ireland – will aim to stop tax competition between states. An absurd target of returning all other eurozone states to a budget deficit to GDP ratio of 3% by 2013 (and Italy by 2014) can only mean a continued assault on European workers’ living standards.
What is the euro?
By the time of the global ‘credit crunch’ in mid-2007, the euro was the second global reserve currency after the US dollar. This was the outcome of deals between the German Federal Republic and France from 1950. By 1969, it was evident that Germany would support a single-currency European monetary system if France supported German reunification. France would then partner in the success of German capitalism: low interest rates, low inflation, a large market for its products and good profits would be assured. In particular French usury imperialism would then consolidate its financial interests in all the southern European states. By 1999, with the inescapable drive to defeat their economic rival, the US, the key continental European states had completed the creation of the euro as their financial weapon. Italy and Greece (2001) joined the euro by deceit; advised by Goldman Sachs, everyone pretended that they could meet the EU’s budgetary rules, a state budget deficit of no more than 3% of GDP, and debt no more than 60% of GDP. Phoney data obtained access to cheap credit.
With the absorption of over 16 million East Germans from the former German Democratic Republic, German imperialism successfully pushed its way into eastern Europe and Russia. Many German imports now come from eastern rather than southern Europe. The EU and the eurozone expanded, yet France and Germany still made up nearly half the eurozone GDP. Credit flourished and debts rose, as low euro interest rates prompted spending in the new and economically weaker euro-member states.
The aims of the dominant European imperialist powers were simple: after pump priming with capital inflows, the workforces and all other assets of these junior ‘partners’ were to be enmeshed in arrangements that aimed principally to strengthen the central players.
One currency: many states
The single currency has ended the 17 eurozone states’ individual ability to devalue their currencies, or manipulate their interest rates whenever their private and public international debts swell. Unless some other action is taken, debts may rise until they become impossible to sustain, since the euro exchange rate will not adjust to suit an individual state. The smaller an economy is in relation to the total eurozone, the less its lower productivity is reflected in the euro’s value or borrowing rate. The only constraint on borrowing is the self-interest of the lenders, a fear of bad debts. But banks’ threats not to lend contradict their greedy impulse to extort interest.
There is no super-authority in Europe to constrain state budget over-spends; no Federal European state. There are no common eurozone bonds, which the German Bundesbank anyway opposes. There is no central fiscal authority. So the chief paymasters – particularly Germany – have no choice but to step in to try to manage a situation where lending has gone beyond redemption. The 21 July agreement is the first step towards a necessary fiscal union in the single currency area.
The struggle over losses
Ireland, Portugal and Greece have all massively over-borrowed. In each case creditors desperately tried to save their loans by proposing ever longer payback periods and direct transfers of public property. This was repeated in Greece, but when it could no longer meet its debts, a deep split arose between Germany and France over whether and how private lenders should take the losses.
Each debtor state differs, but the financiers always demand lower wages to raise surpluses. The local bourgeoisie must also be culled and absorbed by multinational enterprise. Locally-owned banks, industry and commerce are reduced or closed. European capital is centralised.
The Irish crisis
The Irish banking crisis was the first of the current rash, and immediately became a sovereign debt crisis. The liabilities of Irish banks were over three times Ireland’s GDP, the third highest ratio in the EU. In September 2008 the EU pushed the government to guarantee the debts of the top six Irish banks and one foreign bank for €440bn. A severe emergency budget in October attacked the living conditions of the Irish people. The Anglo Irish Bank was nationalised in steps between January 2009 and March 2010, while the Bank of Ireland and Allied Irish were part-nationalised in February and May 2010 respectively. A further €4.5bn budget cuts were made in April 2009. Unemployment was by then 13.5%, emigration had risen, and Irish living standards have since fallen by over 20%.
By now crises had erupted in both Greece and Portugal.
The Greek crisis 2010
By January 2010, the Greek government desperately needed €54bn to see out the financial year. The state budget deficit was 13.6% of GDP, over four times the eurozone rules. Total state debt was then 115% of GDP. This included previously unreported military spending of €8.7bn between 1997 and 2003. With 11 million people and a systemically corrupt ruling class, Greece became the largest market for conventional arms in Europe in this period, with the highest ratio of arms spending to GDP in the EU, but with only 3% of eurozone GDP. Greece’s military and political significance to the EU is clear.
The EU approved Greece’s spending cuts and freezes aimed at reducing the deficit to 3% of GDP by 2012. However, on 5 February 2010, $79bn of financial contracts, twice the previous Monday’s sum, were bet against the euro, while the financial crises of the other PIIGS (Portugal, Italy, Ireland, Greece and Spain) deepened. French and German banks were threatened: they had altogether about half of all European banks’ exposure to the PIIGS government, private and corporate debt. BIS estimates that 78% of the €1.9 trillion of Portuguese, Irish, Greek, and Spanish debt held by banks was held within the EU. French banks were holding 24.9% of Greek government bonds and German banks 14.3%, compared to Britain’s 4.1%. Overall, the full eurozone had 58% of Greek government bonds. In March 2010, two German MPs called for an auction of Greek islands and antiquities in exchange for German ‘help’.
On 8 March 2010, French President Sarkozy, with an eye on French loans to Greece, said: ‘If we created the euro, we cannot let a country fall that is in the eurozone … The euro has no sense if there is no solidarity.’ An ECB working paper had already concluded that the European Monetary Union (EMU) is not possible without the EU. (Withdrawal and Expulsion from the EU and EMU, December 2009). Germany spoke anxiously of needing a European Monetary Fund for the eurozone. A proposed EU/IMF 3-year deal, starting with €45bn, €30bn of which was from the EU, allowed Greece to sell €5bn of 10-year bonds at a cost of 6.3%. German demands for deeper Greek budget cuts than France excluded a €1.3bn Greek purchase of German submarines. A further purchase, this time of French warships, was announced on 17 March as bankruptcy loomed. Squeezed by Germany and France, Greece again appealed to the IMF.
Standard & Poor’s downgraded Greek debt status to junk, and reduced Portugal’s and Spain’s at the same time. Confidence in the entire eurozone was at risk. Ten-year loans were now costing the Greek government 13.1%. Germany was paying 2.89%. Even Ireland was paying only 5.23% and Portugal 5.57%. The Greek prime minister spoke of the ‘survival of the nation’.
Ireland again…
By March 2010, the Irish state’s new National Asset Management Agency had bought huge bad loans from the three largest banks and two building societies at 47% discount. The state was handing the country’s revenues and other savings to the banks to protect the country’s bond holders, the ‘high and ultra-high net worth’ individuals, to save Irish capitalism.
… and Greece again
On 3 May 2010, the 17 eurozone members agreed an over-optimistic ‘final deal’, for a three-year €110bn EU/IMF Greek bailout package in return for a severe austerity package of €24bn cuts. These included a wage freeze for public sector workers until 2014, higher taxes and further cuts of 8% to benefits on top of March’s 12%. The aim was to reduce the budget deficit to 8.1% by the year end and a further 2.6% by 2014, 10-11% of GDP. Three people were killed in the rioting that followed. France and Germany denied that arms deals were part of the rescue programme. However, from May, Greece’s economic crimes unit started to investigate $16bn of government contracts over the last 10 years. German Finance Minister Schaeuble had said; ‘We are not defending Greece, we are defending the stability of our currency’. Nevertheless, eurozone stocks crashed between 4 and 7 May 2010 on fears that the Greek debt crisis might not be contained.
Portugal
Mass selling of Portuguese government bonds on Friday 7 May 2010 saw its yields rise eight percentage points above Germany’s. Portugal’s state debt to GDP in 2010 was 84%. German banks held $47.3bn of Portuguese debt and French banks $35.5bn. There was fear that Spain would be next on the speculators’ hit list, where German banks were the most exposed after the British. The rot had to be stopped: Portugal’s GDP was $0.223 trillion, but Spain’s was $1.6 trillion, a different kettle of fish.
The European Stabilisation Mechanism
France then pushed for a European stabilisation mechanism against continued German insistence on bilateral loans. Frustrated at Germany’s reluctance to pay, France’s Sarkozy rushed to announce the creation of a Special Purpose Vehicle (SPV) to reduce burdens on indebted countries, but then had to concede control of the disbursements to the German Debt Management Office. Two SPVs were set up: the European Financial Stability Mechanism (EFSM) with €60bn from the European Commission and €250bn from the IMF, and the European Financial Stability Facility (EFSF), able to raise money by issuing bonds of €440bn. On 10 May 2010 the EU and IMF announced a €750bn bankruptcy protection plan in exchange for national austerity plans. Huge though it is, the EFSF is much too small to rescue either Spain or Italy, and it cannot buy embattled countries’ bonds directly in the event of a crisis.
EU budgetary ‘principles’ abandoned
All the basic eurozone budgetary principles were now abandoned as the bans were lifted on governments bailing each other out or the ECB buying members’ debt. The ECB started to buy PIIGS sovereign debt straight away, including €45bn of Greek bonds over the following 12 months. If any of the PIIGS default, however, the ECB will be in the soup too. But with defaults no longer unthinkable, higher yields can be demanded.
By the end of May 2010, all European governments were imposing sharp budget cuts or freezes. France admitted its own credit rating was under threat and froze all payments except pensions and interest payments until 2013, and cut state ‘operating’ costs by 10%. Spain’s government imposed austerity measures to reduce its fiscal deficit from 11.2% to 3% by 2013. Massive non-performing debts in Spain led to government-forced mergers between Caja Madrid and five other banks. It wants to reduce 45 regional savings banks to a dozen.
In October 2010 Germany obtained a permanent system of bailout funding in the Lisbon Treaty. This Franco-German compromise affects post-2013 sovereign bailouts, but diluted Merkel’s wish that current investors should take losses now. Senior creditors – investing in the safest part of the debt, with lower returns – are protected for the moment, but after 2013 euro bonds will have ‘collective action clauses’, meaning they will have to share any losses.
Ireland again…
By October 2010 the cost of Ireland’s banking crisis was €50bn, one third of GDP. The budget deficit, including bank bailout costs, will be 32.4% this year despite the last two years’ cuts of €15bn (9% of GDP). This is ten times the EU limit and the biggest in the eurozone’s 11-year history. By November, only the ECB would lend to Ireland. The EFSF, the EFSM and the IMF responded quickly to appeals for help, since German banks were estimated to hold €188bn of Irish debt, British banks €178bn, and French banks €106bn. The EU and IMF agreed to a €85bn rescue deal costing Ireland an average 5.8% annually. €17.5bn was seized from the Irish sovereign National Pension Reserve Fund. Britain provided an €8bn loan, as Ireland announced €10bn extra spending cuts with €5bn tax hikes over four years. The minimum wage was cut to €7.65 per hour. The VAT rate will rise to 23% by 2014, but corporate tax will stay at 12.5%. Already 7% of Irish people lived in poverty and 18.5% were on the brink. By 2011 unemployment was 15%.
On 22 November 2010, ‘Buttonwood’ in The Economist noted ‘… the money isn’t being given to Ireland, it’s being lent. And even if the eventual rate is below the market level of 8%, the new debt may still carry a rate of 5% or so. Well, Britain is still paying 3.3% for 10-year money. So this is a profitable gig, borrowing at 3.3% to lend at 5%. Perhaps the government should sell the scheme to the public as the ultimate carry trade, turning Britain into a hedge fund …’ But it is Mr Buttonwood, it is. The total assets of the entire British financial sector in 2010 were nine times British GDP.
At the February 2011 general election Fianna Fail suffered the worst defeat of a government since Britain forced the 26 county state into existence in 1921. The new Fine Gael/ Labour coalition’s immediate attempts to reduce the loan rate were firmly rebuffed by German Chancellor Angela Merkel.
The Portuguese crisis 2011
Portuguese debt is now 92.9% of GDP. It is the third eurozone country to seek a bailout. Following the collapse of the government in March 2011, the caretaker government announced on TV a package of austerity measures demanded by the EU in exchange for a €52bn bailout agreed on 16 May. The IMF/EFSM/EFSF will provide €26bn, each charging about 5.1% interest. Public spending is to be cut by 3.4% of GDP this year, pay frozen and car taxes, tobacco and electricity prices increased. Small pensions are frozen and others cut, while health and education spending have been reduced by €745m.
Greek tragedy
By May 2011 Greece was paying 15% for privately-sourced debt compared to a peak 12.3% in 2010. It has an immense debt of €355bn. The economy shrank 2% in 2009, 4.5% in 2010, and another 4.8% (annually) in the first quarter of 2011. ECB officials demanded Greece relaunch its stalled €50bn privatisation programme. The budget deficit of 13% of GDP for 2011 is well over the target of 8.1%. Unemployment is 16.2%.
Greece needs a further €120bn of loans over the next three years. It can’t pay its debts. If it were outside the EU, it would have defaulted. French and Swiss banks had the greatest exposure to Greek state bonds in January, each with €79bn in liabilities; six Greek banks held about €59bn, German banks €43bn, while British banks had about €19 billion. The international banks want to save their capital and keep political control; how far can they force Greek banks and the working class to pay for their system? The ECB and the European Commission want more privatisation, more austerity, more discipline, more social ‘reforms’. The Bundesbank however wanted some write-downs of private capital too, of which about 20% belongs to six Greek banks. This was opposed by French, Dutch, Belgian, and British interests, whose financiers want only the Greeks to take the hit and who staunchly defend private bank capital.
The IMF had repeatedly said it would not lend if Greece did not do more. On 25 May, Luxembourg minister Jean Claude Juncker, chair of the eurozone finance ministers, threatened to turn off aid to Greece and demanded ‘a privatisation agency independent of the government and modelled after Germany’s Treuhandanstalt’ which had privatised East Germany. ‘Henceforth, the European Union will escort Greece’s privatisation programme as if we were conducting it ourselves’ he added without concern for Greek sovereignty. Greece is now priced out of international debt markets, and depends on the ECB which now accepts Greek state bonds despite their junk status. The ECB insists it will reject all Greek debt if it defaults.
On or off the rails?
In June 2011 the eurozone halted loans of €12bn until Greece pushed through a privatisation plan and a further €28bn budget cuts over four years in order to receive a new 3-year €120bn bailout, more than last year’s €110bn. This is after the majority of Greek workers have already taken a 20% pay cut. The German government now dropped its demand that Greece’s private creditors should take a formal loss on their part of Greece’s €355bn debt since this would be seen as a partial default. France proposed that private banks would ‘voluntarily’ swap their Greek bonds with new longer maturity debt. This stopped the declaration of a ‘credit event’ which would have allowed hedge fund ‘Credit Default Swap’ buyers to claim CDS ‘insurance’ and cause huge financial disturbances.
Yet as soon as one settlement seemed clear, doubts both on the effectiveness of the attack on workers and the redivision of the spoils among creditors arose again. There was no consensus on how the German idea of private sector involvement would work. Yves Mersch, head of Luxembourg’s central bank, said private-sector involvement ‘must not be a precondition …’ as he fears mass investor withdrawal from Italy, Spain and possibly Belgium.
On 4 July, Moody’s downgraded Portuguese debt to junk, to the fury of the European Commission. This reopened the threat of further speculation against the euro. Four days later, the ECB raised interest rates 0.25% again to keep eurobond-holders happy. There is no escaping the contradictions of capital: raising interest rates meant greater difficulties for the PIIGS with their huge state debts, so they had to be fixed at a lower rate for Greece, Portugal and Ireland in the 21 July deal.
What future?
Economic growth is negligible. The current discussion over a ‘Pact for Europe’ to regulate budgets, debts and tax policy anticipates one large economy with Germany in the lead. Neither Germany nor Europe has any choice. However leadership of such a federation of financial wolves will confront the workers and middle classes in Europe with the most reactionary solutions. There will be no protection at any level for workers facing attacks by their employers. A forced sell-off of all state assets will happen. With state backing, all this loot will be amalgamated into a private monopoly system of finance capital.
This euro crisis shows the impasse of the accumulation of capital. Debt problems in the US, with Federal debt 95% of GDP, and the greater mass of private debt worldwide represent a worldwide crisis of capitalism. The collective exposure of banking systems to the PIIGS is $2.9 trillion, most of it with French, German and British banks. The desperate urge to accumulate has created a situation where a massive collapse of these debts, fast or slow, is inevitable, and the cost of all this is already being thrown onto the working class. The 21 July deal does not change this reality. The system is crumbling and those running it must be removed before the imperialist states take more violent action against us and each other.
Fight Racism! Fight Imperialism! 222 August/September 2011
