One sign of how serious the eurozone crisis has become is the brevity with which every supposed “solution” brings relief.
There was the recent “rescue” of Spain when the eurozone promised to lend the government more than £80 billion to restructure the country’s banks.
Within days interest rates on Spanish government debt rose to over 7 percent, a level that economists regard as unsustainable.
Then there was the narrow victory of the Greek Tories, New Democracy, in the general election of 17 June. The markets rallied, but not for long.
This was followed by a flurry of excitement over a plan for the eurozone’s two bailout funds (one doesn’t actually exist yet, but never mind) to buy Spanish and Italian government debt.
By the end of last week, German chancellor Angela Merkel had kicked this into the long grass at a meeting with the chief executives of France, Italy, and Spain.
What is driving the crisis now is what one market analyst has called the “doom loop” that binds governments and banks together.
In Europe the financial crisis began with a borrowing and lending spree on the part of banks in the middle of the last decade.
In the Spanish state, for example, regional savings banks called cajas financed a property bubble that concreted over much of the country’s coastline, usually in cahoots with local politicians.
These bubbles were largely independent of the subprime scams going on in the United States—although Germany’s state-owned regional banks bought the equivalent of the Brooklyn Bridge in what proved to be worthless credit derivatives from unscrupulous Wall Street banks.
When the crash came in 2008, European governments pumped money into the banks. But much of the losses the banks had made were swept under the carpet.
Public borrowing soared, partly because of bailouts but mainly because the recession of 2008–9 pushed up government spending and cut tax revenues.
Then came a succession of government debt crises—in Greece, Ireland, Portugal. The European Commission together with the European Central Bank (ECB) and the International Monetary Fund mounted “rescues”.
These kept up the flow of debt repayments to the north European banks that had mainly lent the money in the first place.
But the austerity programmes mounted as a condition of these “rescues” pushed the affected economies into vicious downward spirals. This included Spain, which hadn’t been formally bailed out.
The speculation that Greece at least would crack and leave the eurozone further destabilised the weaker economies. The ECB tried to come to the rescue last winter by lending over more than £800 billion cheaply for three years to the banks.
Banks used a lot of this money to buy their governments’ debt. This bought time for everyone—but made banks and governments even more vulnerable to each other’s collapse.
Other eurozone economies are being drawn in. Interest rates on Italian government debt have sky-rocketed. There are rumours that Silvio Berlusconi is planning to return to politics on a pledge to take Italy out of the euro.
The amounts that would be required to plug the gaps are now enormous. The economist Gavyn Davies calculates that Spain and Italy will need nearly £490 billion to cover their budget deficits and maturing debt. This is probably beyond the capacity of the bailout funds.
This is not just a financial problem. Most of the eurozone economies have been shrinking for months. Only the robust state of the German economy has been keeping the region going. But the latest purchasing managers’ indices predict a sharp contraction in German manufacturing production.
Great economic crises like the present one act as a giant x-ray, exposing structural flaws. One of the biggest of these flaws lies in the eurozone, a neoliberal construction that has served to entrench the dominance of German capitalism. The probability that it will blow up continues to rise.
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