At $16.2 trillion, the European Union is the largest economy in the world. Even when confined to just those countries that use the euro (the “eurozone”), that economy is the second largest after the United States. Given how the world economy is so intertwined, the crisis of the euro is a world crisis.
And make no mistake about it, this is a real crisis. The Wall Street Journal described it as “a storm raging among small countries at Europe’s fringe (that is moving) to one that strikes a major economic power.” (WSJ 11/10/11)
Central Banks & Contradiction of Nation State
The entire EU project and the development of an international currency – the euro – was an attempt to overcome the contradiction of the existence of the nation state in the era of world production and distribution of goods and services. The Single (European) Market was established in 1993 and the euro currency in January of 1999. In planning for the establishment of the euro, a European Central Bank (ECB) was established six months earlier.
In today’s capitalist world, where money represents wealth rather than actually being wealth, any economic unit that has its own currency requires the existence of a central bank. The US central bank – the Federal Reserve or “Fed” – is charged with two goals: Keeping both inflation and unemployment within limits. It has two tools to accomplish this: It strongly influences the money supply. One if the main means of doing so is through purchasing Treasury notes. In order to purchase such notes, it creates money (dollars). Obviously, increasing the money supply stimulates the economy. On the other hand, if the money supply is increased too much, then inflation threatens. Another main tool of the Fed is the influence it has on interest rates. The “prime rate” it charges private banks for overnight loans has a big influence on all other interest rates. Again, increased interest rates will tend to slow down the economy.
The ECB is somewhat more limited in its powers, exactly because it doesn’t represent a single sovereign state. While it can create money by lending money to (purchasing loans from) EU banks, it is charged in its charter with one responsibility only: Keeping inflation at bay. This is primarily due to the influence of the largest and most powerful nation in the eurozone – Germany. In the 1920s, Germany experienced hyper inflation of thousands of percent. That experience is deeply imbedded in the consciousness of the German bourgeoisie. There is also another factor; German capitalism is a net creditor and much of the loans owed to them are from within the eurozone. Thus, if the euro is weakened, the German lenders will tend to be paid off in a cheaper currency.
Role of Monetary Policy
In other words, a national central bank follows certain monetary policies that help set the course for the national economy as a whole. These policies are determined, first and foremost, by the overall condition of the world economy as well as by that of the country involved. However, what is also important is the situation within the particular country. This includes the relative strength (or weakness) of that economy in relation to the world economy as well as the balance of class forces within that country and the political traditions of that country. The problem for the eurozone and thus for the ECB is that these factors vary so wildly within that zone. During a time of economic stability and expansion, the results of these differences can be minimized; during a time of crisis like the present, they come to the fore with a vengeance.
From its very inception, there were certain tensions in the ECB with representatives of German and French capitalism jousting with each other. These tensions flowed from the somewhat conflicting interests of their respective classes. Other conflicts were built into this entire project. These flow from the law of combined and uneven development, which explains that development is not everywhere uniform and even. Thus, within the eurozone there are highly developed countries like Germany and France and others like Greece and Portugal which are somewhat underdeveloped. On the other hand, the Greek working class has very militant traditions and expectations to match.
Furthermore, every nation has its own political traditions and its own culture. In normal times, these differences can be kept at bay. If the EU had had 30 or 50 more years of economic stability and growth, it’s possible that a degree of integration would have been achieved that could have overcome the national differences and much more fully integrated the region.
Capitalism a System of Crises
But that is exactly the problem. Capitalism is a system of periodic crises, and during such crises all these tensions tend to rise to the fore.
From 2007 to 2010, some 23 million workers in the EU lost their jobs due to the crisis. The weaker nations were struck particularly hard, starting with Iceland in 2008. This crisis then struck Ireland, Portugal and Greece. The essence of the crisis was that in each case loans were considered to be unpayable. The Greek regime, for instance, had gone into ever-deeper debt to keep its working class somewhat pacified. They used a series of complex financing arrangements some of which were worked out by Wall St. firms like Goldman Sachs, in order to obscure the degree of their debt. (These Wall St. firms profited handsomely for their services.) When the degree of their debt could no longer be hidden, world finance capital became unwilling to loan the regime any more money.
As Greece descended ever deeper into crisis, a bailout fund (the European Financial Stability Fund – EFSF) was created in May of 2010. Under the EFSF some of the stronger nations, especially Germany, were to bail out Greece. This step led to rising political strife in Germany and was denounced by other countries such as Slovakia. However, having failed to stem the tide, just three months later a new fund – the Stability and Growth Pact – was established. One month later, the ECB was forced to raise interest rates for the first time since 2008.
In July of 2011, an EU summit agreed that the EFSF would be given greater powers to purchase debt from debt holders (banks), thus in effect bailing out these banks. Two months later, the German representative on the ECB resigned in protest against the ECB’s loosening fiscal policies. Then, one month later (October, 2011) leaders of the 17 eurozone nations met and after ten hours of debate announced that they would socialize some 50% of the losses of Greek debt and also would force the banks to increase their capital as a reserve for future losses. In a sign of things to come, they also demanded austerity measures of the Italian regime.
As opposed to Greece or Portugal, Italy is a major economy within the EU. Its economy has been weakened overall by the domination of German capitalism, which being more efficient has moved into the Italian market. Since monetary union, the growth rate of the Italian economy has been a puny 0.7% and from 2000 to the present the ratio of Italian debt to GDP went from 109% to 120%. The low rate of economic growth led many would-be purchasers of Italian debt to doubt that that debt could be paid off.
In Greece and Ireland, we saw a month long increase in bond “yields” (meaning interest rate on the bond) as investors increasingly considered this debt to be risky. Then there was a sudden spike, followed by a rescue package. Italy now appears to be headed down the same path. On Nov. 21 there was a massive sell-off of EU bonds, with Spain forced to pay nearly 5% on new 3-month bonds and the Wall St. Journal reported that “international institutional investors are increasingly rejecting all but the safest-looking European nations that want to borrow.”
This crisis is being exacerbated by the political struggle over which class will have to take the losses. As WSJ columnist Dave Wessel commented, ‘“Parties that have contractual losses try to shift those losses to counterparties, especially taxpayers,” says Edward Kane, a Boston College economist. (Translation: The banks, who hold loans that are or may be worthless, are trying to socialize their losses – shift them to the taxpayers.) “These crises tend to drag on as long as there’s a chance of sticking taxpayers with the losses.” So first there is denial, then delay, then disguise.’
“Denial, then delay, then disguise” – a perfect description of the process.
Non Eurozone Nations Being Sucked In
The crisis of the euro is drawing in the non-euro nations also. Investors outside of the euro zone have to have some sense of what will be the conversion rate for their currency vs. the euro, but with all the instability they simply have no idea from one month to the next, so they are reluctant to enter into contracts in the eurozone market. Then there are the US banks, which have invested heavily in euro zone bonds, real estate in the eurozone area, etc. If there is a general collapse in that economy, the US banks will tend to be sucked in.
Collapse of EU?
The present situation cannot be allowed to play itself out, and there have been several proposals. All these proposals involve having the stronger eurozone countries (especially Germany) take some degree of responsibility for the debts of the weaker ones. This would be done by creating eurozone bonds – bonds that are pooled from all the eurozone countries. The problem is that any degree of joint responsibility that would be great enough to reassure international finance capital would require a renegotiation of the Lisbon Treaty. It was difficult enough to get that treaty through during good times; a renegotiation of it now seems almost impossible.
Another strong possibility is for some of the countries to leave the eurozone. Either it could be the weak ones leave and the stronger ones stay or vice versa. However, if the weak ones stay, then there would be little confidence in the euro and it would tend to break up. On the other hand, which countries other than Germany are really strong? Even France is showing signs of weakness as its triple A credit rating is coming into doubt.
What seemed unthinkable just a few years ago – the disappearance of the euro – is now definitely on the table. It might not stop there, though. As EU President Herman Van Rompuy said “If we don’t survive with the eurozone we will not survive with the European Union.”
A collapse – even a partial collapse – of the EU would have a disastrous effect on international investor confidence. There are also other possible developments to consider:
New Conflicts in Europe?
In recent decades, political tensions leading to wars have been focused on other parts of the world such as the Mid East. There are also the tensions developing between US and Chinese capitalism. Historically, however, Western Europe has not exactly been without its share of such conflicts – from the Franco Prussian War to WW II. If the EU collapses in a period of rising economic crisis, why would such conflicts not reappear?
There is also the possibility of military coups. Already the possibility of one was implied when former Greek Premier Papandreou dismissed the heads of command of the Greek military. One factor that staves off a coup in Greece is its presence in the EU, whose rules forbid the presence of such regimes. If the EU collapses, or if Greece leaves the EU, there would be no such inhibition.
The development of the EU strengthened the capitalist class throughout that region and, in fact, internationally to an extent. Now, the threatened collapse would mean even greater dangers for the working class.
Austerity No Solution
Even on capitalist terms, the “solution” of “austerity” being proposed for countries like Greece is no solution at all. It will simply lead to a greater slow down of the economy, never mind an even greater impoverishment of the working class. On that basis, the Greek regime would tend to be thrust even deeper into debt as its tax receipts plunged. Others have suggested that if Greece left the eurozone and returned to its own currency – the drachma – that it could inflate its way out of the crisis. The idea is that it could allow the drachma to decline in value, thus making Greek exports cheaper as well as making vacations in Greece less expensive. The problem is that this would lead to inflation and the lowering of real wages for Greek workers.
Workers in countries like Greece and Spain really have little choice but to link the resistance to austerity to the demand that their foreign debt be unilaterally cancelled. One result of this would be that international finance capital would be even more reluctant to finance Greek debt – that is, to buy Greek bonds. The alternative for the Greek workers’ movement would be to take over the Greek banks as the first step in providing credit.
This would be inadequate, though, and it would have to be linked with similar steps in other countries in the same situation – Spain, Portugal, Ireland, etc.
Such an international movement would reverberate around the world. Its echo in the German workers’ movement would be found as the German banks started to teeter on the brink. These banks would be in danger because of the massive losses they would suffer due to the cancellation of Greek (and other) debt; in other words, these banks are heavily invested in Greek debt, and their investments would have collapsed. The German bourgeoisie would be calling for a bail-out of these banks, but the cancellation of foreign debt in the debtor nations would find its echo in the demand that the banks invested in this debt be taken over, be under public ownership.
Socialism or War
In other words, the options for both the capitalist and the working class are narrowing and the difference in the potential outcomes is increasingly start – increased attacks on the working class and increased tendency towards war or socialism.
Update (Dec. 5, 2011)
Since the above was written it seems that a rescue package of sorts is being worked out. Either the ECB will simply print up money to buy debt (bonds) of weaker countries (Greece, Portugal, etc.) or there will be some sort of arrangement whereby the bonds of all the eurozone countries will be sold in a pooled fashion. This would mean that the relatively stronger nations (France and Germany in particular) would share the risk – and therefore the higher interest rates – of the weaker ones.
In either case, what is to go along with this is that the various national regimes will lose control over the purse strings – that bankers appointed from above will control national budgets for the weaker countries. This is almost identical to what the IMF has been doing for years in the underdeveloped world, and the same results can be expected: Massive increases in unemployment as social services are cut and or privatized along with privatization of publicly held assets. Increase in “crony capitalism” and a general downturn of the economies of the nations so affected.