World leaders are in a panic about the future of the eurozone and the economic crisis in Greece.
They fear that Greece could default on its debt repayments next month—which would stop banks getting the money they are owed.
But they are split over what do to about it.
Some say Greece should be kicked out of the euro in an attempt to stop its crisis spreading. Others want to see a new bailout for Greece and are desperate to hold the euro together. They fear that if Greece defaults on its debts, other countries could follow.
Yet politicians agree on one thing—that the problem is too much government debt. Their solution is for governments to cut their deficits.
So British prime minister David Cameron says that some countries have been living beyond their means and need to slash their spending. He compares government deficits to a household’s credit card debt.
But this ignores the real reasons for the rise in debt.
After the introduction of the euro, banks and other investors flooded the “periphery” countries of the eurozone with cheap credit.
They weren’t trying to improve workers’ living standards. They were trying to make a profit by encouraging spending with money that didn’t exist.
This cheap credit benefited the rich, who profited massively and are experts at avoiding tax. But the level of debt in countries like Greece grew. And the cost of living in Greece rose by more than 35 percent between 2000 and 2008.
The influx of cheap credit encouraged countries to rely on debt to get by.
When the economic crisis hit and access to credit dried up, the poorest countries suffered the most.
So the crisis is rooted in bosses trying to protect their profits. But it can’t be understood without looking at the deeper problems within capitalism.
Capitalism is driven by bosses competing to accumulate profits. As time goes on, they invest in more machinery and advanced technology to produce more cheaply and undercut their rivals.
But bosses make their profits by exploiting workers.
And as they invest in more machinery and fewer workers, this drives the value of their goods down over time.
Unplanned competition also leads to overproduction—and a vicious circle then begins.
Bosses end up with gluts of goods that no one wants to buy. They cut back on production and sack workers, which means workers have less money to spend.
Capitalism can overcome this by destroying large amounts of capital. But the same problems are stored up for the future, so crisis will always recur as long as capitalism remains.
Since the 1970s capitalists have desperately tried to stave off a crisis by keeping profits afloat.
They did this partly by squeezing more money out of workers. But they also spun an intricate web of debt and dodgy finance to make sure individuals and states could keep spending.
Global capital markets exploded in the 1980s and expanded several times again in the decades that followed.
But since 2007 that web has been unravelling.
First, dodgy “subprime” loans made to poor people in the US began to lose value after more and more of the debtors defaulted. Banks and other investors, who had bought up these debts in the hope of making money from them, found that their investments became worthless.
Banks stopped lending in response and governments spent hundreds of billions of pounds bailing them out in 2008. This halted the collapse—temporarily.
But it didn’t stop the rot. It simply shifted the problem from the banks to the governments.
Since then the problems have got worse. Now the stronger European economies have started bailing out the weaker ones.
But not even the German government or the International Monetary Fund (IMF) have enough money to underwrite all the debt in the eurozone.
Its rulers are now desperate to stop the process from going any further. That’s why Greece’s creditors have been so vicious in their demands.
They are sending a warning to the governments of Italy, Portugal, Spain, Ireland and Belgium.
Their message is clear—if the banks come for them next, then they shouldn’t rely on Germany or the IMF to bail them out. They will be expected to raise the money themselves—by squeezing workers dry.
But workers are fighting back. Trade unions in Portugal have called a general strike next month. Activists there and in Belgium say the strike culture is changing, with workers becoming much more active in pickets and demonstrations.
Greece has seen more than 15 general strikes in the past two years. Now workers are beginning to take control of workplaces to stop bosses from imposing cuts.
This process has a long way to go yet. But as Europe’s rulers dither and fail to stem the crisis, workers are showing that they have an alternative.
Why don’t governments just default?
Workers in all countries that have received bailouts have raised the prospect of defaulting on the debts. They ask why they should pay for a crisis that they didn’t cause.
If workers force their government to default on its debts, they will have rejected the authority of the banks and the Troika.
They will also score a powerful blow against austerity for workers across Europe.
But banks and other governments are putting massive pressure on these governments not to default.
Those leaders who advocate paying say that if they can’t pay their debts no one will invest in their countries.
Others argue that they will default sooner or later, and it is better to do it sooner and avoid the worst of the cuts. They also point out that any country that leaves the euro could devalue its currency to boost exports.
The same debate exists in the core eurozone countries. Some argue for kicking out Greece in order to “quarantine” the rest of the eurozone.
But for now this is unpopular. For the German government in particular, writing off Greece’s debt might be a price worth paying on its own. But if one country defaults, it could set a precedent to others.
Leaving the euro wouldn’t solve everything for workers.
A newly “independent” government would probably try to drive down wages to restore businesses profits.
Even if they went back to the drachma currency, Greek workers would still have to fight against Greek bosses who are closing workplaces and slashing jobs.
Why don’t governments just default?
Europe’s rulers say that Greece’s debt results from reckless spending and extravagant lifestyles.
In reality it was forces outside Greece that encouraged the debt.
In the early 2000s, money poured into peripheral eurozone countries—such as Greece, Ireland, Portugal and Spain.
Investors saw government bonds as safe places to invest and so bought them up.
The Greek government got money by selling bonds.
But as these are effectively IOUs, the money was credit—or debt.
After the “credit crunch” of 2007, investors pulled back from buying up bonds.
Governments then found it more difficult to use bonds to borrow money.
Money started to drain out of poorer countries like Greece as investors called in their loans.
Who do governments owe money to?
All governments owe money to banks. They raise money by issuing bonds to banks and other investors. These are effectively IOUs. After a set deadline, usually ten years, the government agrees to buy back the bonds and pay a set amount of interest.
Countries that have been bailed out by other governments also owe vast sums of money to them. The so‑called “Troika” (see far right) administers these bailouts.
For example, Greece owes more than £90 billion for a bailout it received in 2010.
Loans worth over £70 billion each were agreed for Ireland and Portugal the following year.
European rulers present these loans as an act of kindness towards the people of these countries—an attempt to “rescue” them from economic chaos.
But the money doesn’t go to ordinary people. It goes straight to the bankers and other lenders to whom their governments owe money.
So when the French and German governments “bail out” Greece, they are effectively bailing out French and German banks. The British government bailed out British banks by bailing out Ireland.
Bailouts don’t help governments pay for public services and welfare. Instead the conditions attached to the bailouts require them to make ever more brutal cuts.
What does Germany have to do with it?
Germany is the biggest economy in the eurozone and bailouts are impossible without the German government’s support.
The Independent newspaper recently ran a graphic cartoon of German chancellor Angela Merkel devouring the corpse of Greece.
Many Greeks compare the Troika’s imposition of austerity to the German occupation of Greece under the Nazis.
But the idea of Germany taking advantage of the crisis to expand its own influence is only half the story.
Germany’s rulers are panicking because they have the most to lose from the collapse of the eurozone.
They denounce their “irresponsible” eurozone neighbours, but they know that Germany’s economic boom depended on higher spending in the rest of the eurozone.
Germany has one of the world’s biggest export economies. Some 60 percent of its exports go to other eurozone countries.
The introduction of the euro in 1999 gave Germany a massive boost.
While German banks sent money to peripheral eurozone countries, those same countries imported German goods.
The boom in Germany was only made possible by the German government’s “Agenda 2010” attacks on workers’ wages, rights and conditions.
Greek and German bosses did well out of their relationship—at the expense of Greek and German workers. But now the bubble has burst, the bosses are turning on each other.
What is the Troika?
The Troika is the name for three international organisations that administer bailouts—the European Central Bank (ECB), European Union (EU) and International Monetary Fund (IMF).
The ECB and the EU’s European Financial Stability Facility “bailout fund” get their money from European governments, especially Germany.
And countries across the world, including Britain, donate to the IMF.
The organisation has a long and sordid history of lending money to countries in crisis and demanding austerity and privatisation in return.
It calls this process “structural adjustment”.
Reforms pushed by the IMF have wreaked havoc in the developing world.
Its policies were central to creating a “lost decade” in sub-Saharan Africa in the 1980s, and worsening the South East Asian financial crisis in the 1990s.
In the 1970s the IMF demanded spending cuts from Labour prime minister James Callaghan in Britain.
The Troika now functions as the austerity police of Europe. It sends officials to visit indebted countries and oversee government spending cuts.
Credit Ratings Agencies
The Moody’s credit ratings agency last week threatened to remove Britain’s “triple A” score.
Credit ratings agencies are meant to use ratings to assess the risks
attached to debt. In reality, they are a racket.
Anyone who wants to issue a bond has to pay these agencies to give them a credit rating.
The higher their ratings, the more likely clients are to go to them.
So this creates an incentive for agencies to downplay the risks involved with bonds issued by rich clients.
We saw this when agencies gave high ratings to subprime mortgage lenders—before the subprime mortgage crisis erupted.
Credit ratings agencies like Moody’s and Standard & Poor’s tell investors which governments are most likely to be able to pay off their debts.
This gives them enormous power.
A government that is downgraded can find it becomes more expensive to borrow money.
But the idea that the agencies are all-powerful can be quite useful for politicians.
So chancellor George Osborne says that Britain’s “negative outlook” from Moody’s shows that the markets agree with him about the severity of the deficit and want him to make faster cuts.
But when credit rating agencies have given Britain a thumbs up, he has argued the opposite—that markets are confident in Britain because they trust him to make cuts.
Whatever the ratings agencies say, the Tories hear “more austerity”.