Enter the bankers

The growing crisis in the eurozone has left many observers and politicians reaching for apocalyptic language. The Financial Times’s leading economist, Martin Wolf, declared “What is at stake today is…the stability of the European – perhaps the world’s – economy”, while German chancellor Angela Merkel described it as the “toughest hour since the Second World War”.

The stakes are high. The 27-state EU is the world’s largest economy with a GDP of $14 trillion and a population of over 490 million. And the 17-state eurozone contains three out of four of the EU’s largest economies – Germany, France and Italy. The global significance of the crisis in the eurozone is huge.

In 2010 the injection of vast sums of money to prop up the economy of Greece and to plough into the banking system averted a collapse of the eurozone. It is now clear that those huge interventions only brought a temporary respite. Round two of the eurozone crisis is unfolding with even greater ferocity and drama than a year ago. Political chaos has intensified as the European ruling class try to save the euro, but also defend their own interests.

The crisis has spread from Greece to Italy, the eurozone’s third largest economy. The sums of money needed to bailout Italy are colossal – estimated at €650 billion over three years. Italy represents 16.8 percent of the eurozone GDP, Greece just 2.3 percent.

The massive 48-hour general strike on 18-19 October – and the unprecedented protests that accompanied a traditional day of military parades on 28 October – forced George Papandreou to offer a referendum on the latest austerity package. The resulting panic saw the “troika” – the European Commission, IMF and European Central Bank – swiftly get the referendum cancelled and then new governments, each headed by unelected bankers, effectively imposed on first Greece, then Italy.

Lucas Papademos, who now heads a “government of national unity” in Greece, was governor of Greece’s Central Bank in the 1990s (where he oversaw Greece’s entry into the euro) before becoming a vice-president at the European Central Bank. Mario Monti, the new Italian premier, who has also appointed himself finance minister, is a former European Competition Commissioner and former Goldman Sachs executive (where he remains listed as an international adviser). Democracy is being bypassed to drive through austerity in the face of bitter opposition.

Yet the crisis continued to deepen. By mid-November the eurobond market suffered a mass sell-off as the crisis threatened to spread to every country in the eurozone – except for Germany. The chief economist at Hermes said, “Markets are losing patience so they are going for the jugular, which is the core countries not the periphery.”

At the time of writing the future of the eurozone hangs in the balance and it is far from clear how the ruling classes of Europe will and can extricate themselves. The European ruling classes without exception have tried to foist the burden of the crisis onto working class people through draconian austerity measures. But they are now arguing among themselves and with the banks about how they are going to distribute the pain.

The thrust of the media and politicians is to demonise countries such as Greece and Italy, as well as Ireland, Spain and Portugal, and blame the crisis on them for their “excessive” welfare spending. But it is important to understand that the crisis of the eurozone is a continuation of the crisis of 2007.

What began as a speculative bubble in the US housing market in 2006 and 2007 (the so-called subprime crisis) – and the credit crunch that followed – developed into a full-scale global economic and financial crisis and the first fall in output since the Second World War.

The scale of the problem was so immense that fears that the whole system might fail led to massive rescue packages for banks and financial institutions. This amounted to what were the greatest nationalisations in world history. By 2010 it had morphed into something that extended well beyond financial markets and became the sovereign (state) debt crisis with problems in Greece, Ireland, Spain and Portugal.

To understand the roots of the crisis in the eurozone we need to rewind 20 years. If we bundle together the Single Market (1992), the Maastricht Treaty (1993), the Stability and Growth Pact (1997) and the introduction of the euro (1999) they amount to two things: a bigger territory for firms to improve their profitability by easing movement and restructuring across borders and a mechanism for disciplining governments if they exceeded spending limits. This put pressure on these economies to improve their competitiveness as they could no longer rely on devaluing their currency to gain a speedy advantage over competitors.

These systematic pressures on labour have intensified differences in competitiveness, splitting the eurozone into the core (Germany) and the periphery (Spain, Portugal, Ireland, Greece). The race for competitiveness was won by Germany, which managed to hold down wages much more successfully than the peripheral economies. By pressurising wages for the last decade Germany has increased its competitiveness and has built up a surplus on its balance of payments which has been mirrored by deficits in the periphery.

The loss of competitiveness forced peripheral countries to boost their domestic demand, through investment in real estate and consumption. At the same time German banks have been lending to the rest of Europe so that they can go on buying German exports. Martin Wolf describes this as the eurozone allowing a “once in a generation party” with vast asset bubbles, in property in particular.

The result left peripheral countries exposed and vulnerable to the crisis of 2007 to 2009. Inevitably this led to the current sovereign debt crisis. This was because of the scale of the bailouts necessary to prop up the banking system, the increasingly high cost of repaying their debt and the decline of public revenue as the recession bit. These three factors led to an explosion of fiscal deficits. Speculators zoomed in on the Greek economy, which sent the interest on its government debt sky-high. In 2010 Greece needed its first massive “bailout” in the form of lending from the EU. Ireland and Portugal both faced similar problems.

Although in May 2010 an immediate meltdown was averted, the crisis in the eurozone and Europe re-emerged in the summer of 2011. There was a growing realisation that Greece had had such punitive conditions put on repaying its debt that it was going to default. Some of the biggest banks in France, Germany and Belgium hold tens of billions of euros in sovereign bonds from “struggling” peripheral countries including Italy, which have seen their bond values plummet.

The problem in the eurozone has come full circle. The possibility of Greece defaulting is causing problems in the banking systems of the core economies, such as Germany and France, as they hold large amounts of government debt from Greece.

In October, the Belgian-French bank Dexia had to be nationalised. However, there are fears for major banks across the whole of the EU. The EU is now in the process of recapitalising its banks by injecting more capital into them – a bailout in other words.

Beyond preventing the meltdown of economies and banks in the eurozone, there are much more difficult longer-term decisions for the European ruling classes. The German economy is inextricably linked to the euro. Much of the cash behind the property booms in Greece, Spain and Ireland came from Germany. Therefore a meltdown across the eurozone would cause a banking crisis in Germany.

As a report from the Research in Money and Finance network argues, the political problem is one of different states with diverging competitiveness. They face sharp dilemmas over whether to create a Europe-wide mechanism that can enforce policies to raise the competitiveness of the periphery or risk collapse. This explains why the leading economies such as France and Germany are caught like rabbits in the headlights.

French president Nicolas Sarkozy has trumpeted the merits of a two-speed Europe – where a closely integrated eurozone is not held back by the periphery. Germany does not want to underwrite the debt, but is in favour of closer integration “tightening eurozone governance” with legally binding rules in order to impose competitiveness on the periphery.

This idea of “more Europe” has been pushed even further by José Manuel Barroso (president of the EU Commission) who wants greater powers for Brussels to inspect and scrutinise the spending plans of member states. He said, “We are witnessing fundamental changes to the economic and geopolitical order that have convinced me that Europe needs to advance now together or risk fragmentation.”

The concerns of the ruling class extend beyond Europe. China and India issued a joint statement exhorting Europe to “responsible economic policies”. The EU is now China’s biggest export market and a slowdown in Europe would bring about a new set of problems for their economy. In 2007 China undertook a mega-stimulus which amounted to 14 percent of its GDP. However, China will not dig the eurozone out of a hole. Although it has bought bonds issued by the European Financial Stability facility, it has not agreed to wider intervention.

There is a structural problem at the heart of the eurozone, which is Germany’s balance of payments surplus mirrored by the deficits of the peripheral economies. If external deficits are to fall, then surpluses must also fall.

That has obvious implications for Germany. From the point of view of the capitalist system these countries need to be restored to competitiveness. According to Larry Elliott in the Guardian, writing in early October, “In fact the real culprit is Germany, which has failed to appreciate that for monetary union to work the big creditor nations have a responsibility to help the debtor nations by expanding domestic demand.”

The nation state is an important defender of capital within its territory (wherever it operates). Skirmishes between the ruling classes of the states of Europe expose it as a coalition of competing and very unequal states, each desperately defending its own interests. Thus David Cameron is complaining bitterly about the possibility of an EU transactions tax (Tobin tax) which threatens the bloated profits of the UK’s finance sector.

The EU/eurozone project has had a powerful ideological pull both inside and outside of Europe. Central and Eastern European countries were desperate to join in 2004 and there is a queue of other countries in the Balkans and North Africa lining up for membership. The EU held out a promise of solidarity between poorer and richer states, a route to rising prosperity and a guarantee of democracy. All of this is now called into question.