The global economic and financial crisis is now well into its fourth year. The desperate plight of the Irish economy, and the strains in the eurozone that it has exposed, show that the crisis has still got a long way left to run.
The latest twist in this tale represents the coming together of three factors —the imbalances in the world economy, the continuing banking crisis, and the effects of austerity.
The most important global economic imbalance is between creditor and debtor states.
China and Germany are the two biggest exporters of manufactured goods. They consequently tend to run large balance of payments surpluses.
Symmetrically, they are faced by states such as the US, Britain, and the weaker economies in the eurozone.
These import more goods and services than they export and borrow from the creditor states to cover the difference.
The flow of capital and goods from China to the US has underpinned the world economy for the past decade.
But this relationship has become increasingly conflict-ridden as the US has sought to devalue the dollar in order to make its exports cheaper.
At the recent G20 summit in Seoul, China successfully resisted American pressure to allow its currency to rise against the dollar.
In Europe, the conflict between creditor and debtor states takes place largely with the framework of the eurozone.
It is also much more unequal, since it pits Germany, economic powerhouse of the European Union, against much smaller and weaker states—above all, Greece, Portugal, southern Ireland, and Spain.
Indeed the whole project of European economic and monetary union (EMU) that led to the launch of the euro in 1999 had two main aims, as far as its mainly French architects were concerned.
The first was to help make the EU a counterweight to the US, the second to control German economic power and to harness it to common European objectives.
But EMU has completely failed to achieve these goals because of its inherent flaws. There were always deep economic divergences between the participants in the euro, and these have grown dramatically over the past decade.
German firms have succeeded in reorganising and raising their competitiveness at the expense of their workers.
Real wages stagnated during the 2000s, helping Germany to maintain its 9-10 percent share of world exports despite China’s explosive growth.
Elsewhere in the eurozone, real wages rose. This meant that Germany’s European partners were becoming less competitive, but they could no longer devalue their currencies to make their exports cheaper. Within a state, regional divergences of this kind can be contained. Government taxation and spending tends to shift resources from rich to poor areas.
But EMU is purely a monetary union, and, at German insistence, member states that got into financial trouble couldn’t be bailed out.
During the comparatively balmy years after the euro’s launch, financial markets ignored this. The weaker eurozone members were able to borrow money at interest rates little higher than those offered Germany.
This cheap credit fuelled property and consumer booms in Ireland and southern Europe.
Then, when the boom turned to bust in 2007-8, governments borrowed and spent heavily to prevent the Great Recession becoming a depression on the scale of the 1930s.
What made the growth of public and private debt so dangerous was that it intersected with the banking crisis that precipitated the biggest financial crash since 1914 in autumn 2008.
European banks had borrowed massively to help inflate the huge speculative bubble centred on the housing market that developed in the US and parts of Europe in the mid-2000s.
Of nowhere was this more true outside the US itself than in Ireland, where the property bubble at its peak amounted to a fifth of national income.
But in France and Germany, which avoided these excesses, the banks were deeply involved in buying US credit derivatives and lending to southern European governments.
The wave of government bailouts mounted in autumn 2008 was intended to shore the banks up. But the latest Financial Stability Report from the International Monetary Fund (IMF) estimates banks’ losses in 2007-10 at $2.2 trillion—down from its earlier estimates but still huge.
It also points out that banks’ heavy borrowing during the bubble means that they have to refinance over $4 trillion worth of debt in the next two years.
The problem is bigger for eurozone banks than for their US and British counterparts.
The banks’ continuing fragility has been central to recent eurozone crises. In April and May the financial markets pushed up the interest rate on Greek government bonds in the expectation that Greece would default on its debt.
What forced the eurozone to intervene was partly the fear of “contagion”—in other words, the crisis of confidence might spread from Greece.
But the fact that the German and French banks had lent heavily to Greece, Portugal, and Spain helped to concentrate the minds of chancellor Angela Merkel and president Nicolas Sarkozy.
Thus the EU’s decision in May to set up a 440 billion euro European Financial Stability Facility was essentially a second bank bailout.
Though Merkel went along with this under pressure from Sarkozy and from Barack Obama, the German government then campaigned for changes in the EU treaties that would impose sanctions on member states for spending and borrowing too much.
The tough German stance partly arose from internal political pressures. But it also reflected confidence stemming from a strong revival in German exports, particularly high-grade manufactured goods heavily in demand in booming China.
The gap is widening between Germany and even France, the other leading eurozone state.
Tough German bargaining has increased tensions within the eurozone. And Merkel’s warning that the treaty changes would mean that lenders would have to pay part of the costs of future bailouts spooked the markets.
The immediate victim has been Ireland.
In October 2008 the Irish government underwrote most of its banks’ debts, as the Financial Times put it, “thereby turning the state and the banks into one entity from the viewpoint of financial markets”.
But the Irish banks are bust, kept alive by loans from the European Central Bank (ECB).
As this has become clear in the past few weeks, they started haemorrhaging corporate deposits, and interest rates on Irish government debt soared to unsustainable levels.
Last weekend the Irish government accepted what the Financial Times cynically called “the quasi-protectorate status of Greece, under the tutelage of the IMF-ECB-[European] Commission troika”.
But no one knows whether this will stop the “contagion” spreading. If the financial markets start to target Spain, also the victim of a property bubble and a much bigger economy than Greece or Ireland, the eurozone could be in real trouble.
A third destabilising factor is provided by the austerity policies sweeping Europe.
These are supposed to reduce government debt by cutting public spending, but all the signs are that they are making things worse.
The Greek government has just had to pledge to make deeper cuts in public spending after projections emerged that its budget deficit will be 9.4 percent of national income this year, rather than the eight percent agreed at the time of the EU-IMF “rescue”.
One reason why this target was missed is that the economy shrank by an unexpectedly high 4.2 percent.
Austerity, by cutting demand for goods and services, reduces economic output and so makes the burden of government borrowing heavier.
Despite a severe economic slump and devastating cuts, an IMF report on Ireland still insists “the high Irish price and wage levels will require a period of ‘internal devaluation’ over the next few years to support export growth.”
The only cure for the ills of austerity offered by the reigning neoliberal consensus is yet more austerity.
A better future depends on the massive social and political struggles needed to break the stranglehold of neoliberalism.