Eurozone crisis: Lost in Euroland
As the eurozone crisis develops, its political and institutional leaders are becoming increasingly desperate as they look for a way out. The latest postponement, amid increasing friction between the French and German governments, of a decision on the eurozone’s next steps is an indication of the crisis’s seriousness. Here, in an analysis written for Socialism Today (November 2011 issue), monthly magazine of the Socialist Party (CWI England and Wales), Robert Bechert examines both the crisis and the test it poses for the left.
“The Euro should not exist (like this)”
“Under the current structure and with the current membership, the euro does not work. Either the current structure will have to change, or the current membership will have to change.” (UBS Investment Research, 6 September, 2011)
This blunt statement, at the start of a widely circulated report by a leading Swiss bank, brutally summed up the fundamental character of the ongoing crisis in the eurozone. Despite a series of emergency meetings and agreement of rescue plans this crisis continued to deepen, threatening not only the European economy but also to dramatically worsen the already deteriorating world economic situation, and help trigger a dreaded “double-dip” recession. That was the reason US Treasury Secretary Geithner attended an EU finance ministers meeting in mid-September. European governments faced a potentially massive crisis with no easy way out, as long as capitalism remains.
Desperate attempts are being made to patch up a “solution”, although how long any deal will last is a different question. Within 24 hours of a plan surfacing at the mid-October G20 finance ministers meeting Angela Merkel’s spokesperson was warning against “dreams currently doing the rounds” that everything will be solved at the following week’s EU summit, and then a decision was formally postponed to October 26 at the earliest. At the G20 meeting one minister warned of a “world of pain” if no solution was found, something which millions are already starting to suffer as the crisis hits them.
The widely perceived helplessness of the governments and EU institutions, the fact that repeatedly they are seen to be lagging behind events and incapable of putting forward a solution has only added to the spreading popular fears of what lies ahead.
This is not an abstract crisis. The eurozone disarray is adding to the misery facing many workers and youth across Europe. Living standards are falling as inflation is rising, alongside increasing unemployment in many countries. Cuts in services and wages are widespread. In Greece, currently the worse hit country, the vast bulk of the population is plunging downward into a deep economic and social crisis and facing a huge drop in living standards. The London Financial Times estimated that “planned tax increases and spending cuts for 2011 are equivalent to about 14 per cent of average Greek take-home income – or 5,600 euro for every household … (measured on) a per-head basis, the total 2011 austerity package is worth 2,200 euro” (18 October, 2011). Europe is on the edge, facing the possibility of a sudden crisis, especially a banking and financial meltdown that could paralyse much of the ‘real’ economy.
A wake-up call
As popular fears grew, governments in and outside of the eurozone rapidly became aware of potentially devastating impact that an event, like a sudden Greek default, could have. ‘Contagion’ would spread throughout the international financial system. After looking over the abyss of what a new banking crisis and/or a country leaving the euro would mean, the main eurozone countries drew back and agreed to make another attempt to defuse the situation.
In recent weeks warning signs were flashing. Rumours flew around about the condition of the banks. Many are facing a critical situation which is why the European Central Bank (ECB) has again taken steps to prop some up. While the early October collapse and subsequent nationalisation of the Belgian-French Dexia bank took the headlines for a few days, it was hardly mentioned that simultaneously two smaller banks, Max in Denmark and Proton in Greece, were also nationalised.
At the same time as UBS published its views on the Euro, the chief executive of Bosch, the world’s largest auto parts supplier, warned that the eurozone has entered “an extremely critical situation”. While the German owned Bosch had full order books now “in 2008-09 we experienced how fast these orders can melt away” (Financial Times, London, website 7 September, 2011).
The worsening world economic prospects are deepening the European crisis, not just in the eurozone but also in Britain. As Wolfgang Münchau wrote “The most disturbing aspect of the eurozone right now is that every crisis resolution strategy depends upon a moderately strong economy recovery” (Financial Times, London, 5 September 2011)
The CWI had warned before the euro’s launch that it would not lead to unity, but would breakdown as result of clashes between the rival national capitalisms and, in the absence of a workers’ alternative, strengthen nationalism. (See below)
In fact, the euro has created a Frankenstein monster. The Greek crisis has brutally revealed this truth. At one time markets expected a Greek “managed default” and there were voices inside the stronger eurozone countries that Greece should be thrown out. The German transport minister Peter Ramsauer told Die Zeit in mid-September it would “not be the end of the world” if Greece were kicked out of the single currency. But the growing realisation that this meant the prospect of massive collateral damage across the international banking system has forced other governments to act.
For now discussion of forcing weaker countries, like Greece, to leave or the possibility of stronger countries, like Germany, deciding to quit the euro has stopped, although this can reappear in the future. The failure of Belgian-French owned Dexia was a wake-up call. One reason for Dexia’s collapse was its exposure to Greek government debt estimated at 39% of its equity capital. But this was not unique amongst banks, this summer the comparable figure at Germany’s second biggest bank, Commerzbank, was 27% (Wall Street Journal, 31 August, 2011). Dexia’s collapse was a warning that it would be extremely expensive to maintain a financial firewall around Greece should it suddenly default.
A more drastic haircut?
With spreading fears of both the “health” of banks and impact of a Greek collapse, banks once again turned to the ECB as a “safe” place to invest, rather than lend to other banks, and for short-term funding. But it is not just a question of Greece triggering a crisis, unexploded financial bombs litter the European landscape. The European Bank for Reconstruction and Development has just cut back the forecasts it made in July for 2012 economic growth in central and eastern Europe – in Hungary from 2.8% to 0.5%. Not only does this bode ill for Hungarians but also it threatens Austria’s banks, which are heavily exposed to Hungary.
The new drive to attempt to stem the crisis was behind the pressure in October to force Greece’s creditors to accept more of a “haircut”, a reduction in the amount of their loans they will actually get back. In July’s rescue deal an average 21% was agreed in July. At that time the French government, fearing the impact on its own banks, rejected a 40% cut, however by mid-October figures of 40% to 60% were being discussed such was the seriousness of the situation. This, governments hope, would avoid a formal default and allowed a managed restructuring that would prevent a sudden crisis. But even with this figure it would not be the rich who really paid, the banks would attempt to offload the cost onto taxpayers and customers.
Nevertheless banks resisted any increased losses. German banks, in particular, were bitterly complaining. Andreas Schmitz, head of BdB (German banking federation) warned that politicians should not declare “war” against banks (Bild.de website, October 15, 2011). The next day Schmitz accurately summed up the current reality of the crisis when he said that the October 15 anti-bank protests were “a diversion from the fundamental problem: that we can no longer finance our welfare states”. (Financial Times, London, website, October 16, 2011). Of course when Schmitz spoke of “we” he meant the capitalist system and its ruling classes.
Really, a poker game is going on as the different countries and financial institutions struggle over the size of the “haircut”, the roles of the ECB and EFSF (European financial stability facility), how the EFSF will be funded, the role of funding from outside the EU and other issues. Relations between the French and German governments have become strained. While there is enormous pressure to reach an agreement, even if there are doubts as to how long it will last, the risk of “accident” causing a disaster is ever present.
Dangerous to leave
Fearing the consequences of a break-up of the current eurozone or an abrupt Greek default the stronger EU powers are debating possible new structures to tighten controls over economically weaker countries as a price to provide financial support.
While “Eurobonds” would appear to be a logical capitalist solution for the ruling classes to attempt, they would run up against the growing popular opposition in all countries to the idea of underwriting other countries’ banking debts. This is not simply as a result of nationalist campaigns against, for example, Greece. Falling living standards in most countries and the bitter understanding since 2007/8 that much of the bailouts will actually end up in the hands of the banks and finance markets also fuel the opposition.
In answer to this opposition to financing other countries’ debts there are proposals to set up new structures to impose controls on eurozone countries. How effect they would be is another question. In 2003 the euro’s original Stability and Growth Pact (SGP) was ignored because the two largest powers, France and Germany, broke its conditions. In an attempt to escape political pressures for flexibility, the Dutch Finance Minister Jager, while supporting the German economics minister Rösler’s idea of a European Stability Council that could impose sanctions, said that its decisions should be made by “academics and experts – but no politicians” (Spiegel Online, 22 August 2011).
However such measures will only back fire, already in Germany there is resentment at what is referred to as the EU moving towards a “transfer union”, meaning a permanent movement of funds from the richer to the poor EU countries, although in reality much of these payments end up back in the banks of the richer countries.
The tensions inherent within the eurozone will increase, especially in this period when there is no immediate prospect of sustained economic growth.
Events this year have posed the question about the eurozone’s future, whether all the present members will remain? As the UBS report (see box) shows there would be substantial economic and political costs and dangers involved in leaving the zone. This is the Frankenstein factor, the eurozone countries have created a system which is imposing huge costs on some economies and strangling others, but which is very dangerous to leave.
However, while these costs can delay such a break, tensions could mount that will force a brutal shakeup. This is why, despite the massive overheads, there are discussions both about the possibility and methods of break-up of the current eurozone, both “weaker” countries leaving or of Germany pulling out. In Germany there is a kind of undercover debate within the ruling class because, while leaving the euro would remove the need for it paying towards the weaker eurozone countries, this would, at a stroke, cut its “home” market from 332 million to just under 82 million. At the same time German exports would be undermined by a new currency that would probably initially soar in value.
A living struggle
Alongside the mounting euro crisis and national difficulties, there is rising anger amongst workers, youth and the middle class as the effects of the crisis bite deeper. This is the reason for the unpopularity of most European governments, the mass demonstrations and strikes in a series of countries.
A new stormy period has begun and sharper struggles will develop. While determined struggle, the threat of resistance or a very serious economic or social situation crisis can force governments to make temporary concessions, generally the ruling classes will be forced by the crisis of their system to, at best, hold down living standards. That is the meaning of Andreas Schmitz’s statement and the reason why ruling classes will be forced to attempt to push attacks through.
Faced with serious opposition, governments will tend to move to use more authoritarian methods. These will vary according to the situation in each country, but in the worse case scenario the ruling classes will even look to dictatorial measures.
Today, Greece is facing a social and economic disaster and its ruling class is not confident of what will happen. This is the background to the report last May in the German mass-circulation newspaper Bild, that the CIA were speaking of a possible coup in Greece in the event of severe unrest developing. This is unlikely in the near future, but in a situation of continuing turmoil such an attempt cannot be ruled out. The Greek military have done this before, the last time they staged a coup was in 1967 and they ruled for 7 years. But a new coup, in a time of deep crisis, would not automatically be a repeat of the last colonels’ regime.
Such a development is not inevitable, but depends on the character and policy of the opposition movements, particularly what the workers’ movement does.
In some sense it is a race between the left and the right as to who will lead the opposition to the eurozone’s polices. Already in a number of countries, it has been right populists who have, in the absence or weakness of the left parties, made electoral gains by combining taking up some social issues with nationalist based anti-EU and anti-migrant slogans. In Greece overwhelming opposition to the cuts and the country’s downward spiral has created a potentially revolutionary situation but, so far, there is no mass based genuinely socialist force that can give concrete direction to the movement.
Unfortunately the response of the official leadership workers’ movement has been limited, with most of the pro-capitalist trade union leaders only organising any action when they have been pushed from below. Even when actions are organised the trade union leaders try to restrict them to symbolic actions and strive to avoid them becoming a step in a serious struggle.
European left
There is a reluctance within the trade unions and in many left parties to challenging the EU or euro itself, something sometimes justified by pointing to the EU’s right wing nationalist opponents. Rather than explaining that the EU is not a step towards socialist internationalism but a club of capitalist nations run in the interests of big business and the big powers, the largest grouping of European left parties, the European Left Party (ELP), talks of a “refoundation” of the EU without mentioning any break with capitalism and, by implication, supports the continuation of the euro.
The UBS report warns of the wider possible consequences of a massive crisis and eurozone breakup. There would not only be huge disruption but the growth of national tensions and conflicts. UBS is not alone in warning of the “some form of authoritarian or military government, or civil war”. In mid-September the Polish Finance Minister warned the European Parliament, in a “personal” comment, of the dangers of new wars in Europe. Later he was asked to explain this and he said that while war is not likely “within a four-year legislative time frame … Not in the months ahead, but maybe over a 10-year time frame, this could place us in a context that is almost unimaginable at the moment.”
While not immediately posed, future conflicts between states cannot be ruled out if the working class is not able to impose its own socialist solution to the crisis. But the EU, a complete capitalist institution that is effectively run by the major powers, is not a vehicle for either socialist change or democratic socialist planning.
The ELP, whose strongest parties are DIE LINKE (Left party) in Germany, the Parti Communiste (PCF) in France, Left Bloc in Portugal and Izquierda Unida (United Left) in Spain, puts forward a number of individual policies that socialists support, although often these are vague, loose formulations. However it does not link these together into an overall anti-capitalist, socialist programme.
This approach was seen in DIE LINKE’s three demands on what the German government to argue at the October 15/16 G20 finance ministers’ meeting. They were worldwide strict regulation of “Finance Casinos”, a tax on financial transactions and a coordinated conjunctural programme. However, these proposals cannot be fully implemented under capitalism and, while DIE LINKE also mentioned its call for public ownership of the banks, its approach was one of simply demanding measures that could be taken within capitalism.
Naturally Socialists argue for individual demands that can immediately improve the conditions of working people and the poor. But such campaigns have to be accompanied by an explanation that such demands can only provide temporary improvement and that, especially in this time of crisis, a socialist transformation of society is required. Without this explanation they are attempts to run this system in a ‘better’, ‘fairer’ way, efforts that will ultimately fail.
The speculators’ grip
A key factor in the development of this crisis has been the massive pressure from the financial markets. Since the break-up of the post Second World War Bretton Woods currency system and the deregulation of finance there has been a huge explosion of the finance markets, alongside a similar growth of all forms of speculation in commodities, property and spread betting on anything that moved, or didn’t. The figures are simply mind-blowing and are hard to grasp. In the EU finance transactions were, in 2010, 115 times the EU’s 12,300bn euro GDP (Austrian Institute of Economic Research, Financial Times, London, 18 August, 2011). All the political leaders bow to these markets, often their official statements are directed simply to the markets.
Naturally the question of how to break the grip of this speculative market’s grip over nearly all aspects of life is a burning issue. It cannot be ruled out that different capitalist nations, or groups of nations, may attempt to isolate themselves or place some controls on these markets, in effect states clipping the speculators’ wings in the wider interests of the capitalism as a whole. But this would be no long term solution. For example an attempt to go back to a system of fixed exchange rates would not, in the medium or longer term, prevent currency crises or forced devaluations.
There is now growing support for a tax on financial transactions (a ‘Robin Hood’ or ‘Tobin’ tax). This is now the official policy of the EU’s Commission, seen by them as a useful political gesture and a way of raising funds. But while socialists would not oppose such a tax it would leave untouched the basic power of the huge financial and trading institutions that runs these markets.
Similarly simply leaving the euro would not solve the problems of Greece or other countries. Socialists opposed the introduction of the euro and today support breaking its grip and that of “Troika” of the EU, ECB and IMF that are effectively dictating what the Greek government should do. The key question in Greece is breaking with the capitalist system, without this living standards will fall for some time whether or not it stays with the euro.
A socialist task
Socialists would not oppose leaving the euro but would firmly link it to a socialist, not state capitalist, policy of bank nationalisation. In a single country breaking from capitalism a state monopoly of foreign trade and exchange controls would be necessary as a defence from the international markets until similar movements spread to other countries. These steps, as part of a policy to bring the commanding heights of the economy into democratically run public control and ownership, would allow a start to be made in planning the use of economic resources for the benefit of all. Without such a socialist policy the results of leaving the euro would be along the lines spelled out in the UBS report, namely a cut in living standards.
Much of the population opposition to the EU is based upon the way it is run, the privileges of its bureaucratic elite and the way it is run it the interests of the big countries and companies. Socialists however, while fighting nationalist oppression and EU diktats, do not oppose the EU or the euro from a narrow, nationalist standpoint. The unification of the whole of Europe would be an enormous step forward. But this cannot be achieved on a capitalist basis. The existing EU institutions, like the EC, the ECB and so on, are clearly agencies of the capitalist ruling class, incapable of surmounting capitalist limitations.
The task facing socialists is to argue for a socialist internationalist alternative, a voluntary socialist confederation of European states, to the pro-business EU. Without this there is the danger that opposition will take a nationalist direction.
This divisive turning point in EU has opened up new period of sharper struggles, will provide an opportunity to rebuild the workers’ and socialist movement, but not as an end in itself but in order to build the forces that can fundamentally change society, end the chaos and instability of capitalism and really make poverty, and fear a thing of the past.
Europe in turmoil – A socialist analysis
June 18, 2005
The current crisis is a vindication of the analysis of the Committee for a Workers’ International (CWI) that the European capitalist classes are unable to unify Europe to construct a capitalist ‘United States of Europe’, as even some Marxists outside the ranks of the CWI believed.
The EU ‘project’ for greater economic and political integration was rooted in the pressure on the European capitalists from competition from US imperialism and, more recently, from China. This drove them towards increased collaboration and led to illusions that this would result in a politically unified Europe. This trend, along with the process of globalisation of the economy and growth of multi-national and trans-national corporations, illustrated how the productive forces have outgrown the limitations of the national state and to a certain extent have even outgrown continents. The big companies increasingly look towards the world market rather than simply their national or regional base.
Yet, at the same time, this process has its limits and comes up against the insurmountable barriers of the separate nation states and the national interests of the capitalists. In the aftermath of the referendum these factors have reasserted themselves, exposing clearly a clash of interests. Some thought that the process of EU integration and EMU represented the point of “take off” for a unified capitalist Europe.
The CWI consistently argued that this was not the case. Our analysis explained that although the process of integration of the EU went a long way, further than even we originally anticipated, at a certain stage a recoil would take place. This would result in renewed national antagonisms and conflicts between the various national states. This process of unravelling would worsen in the event of a serious economic crisis, recession or slump.
The end of the euro?
The introduction of EMU and the euro was a political and economic gamble by the capitalists, pushed through in the teeth of some opposition from their own side, during the triumphalist wave which followed collapse of the Berlin Wall. Initially the Bundesbank opposed the introduction of the euro but was compelled to accept it in the light of the political pressure of the capitalist politicians who supported its introduction. The stability pact was introduced as a ‘safety net’, which was intended to prevent governments resorting to “profligate spending”.
Yet, the whole idea of the euro was tailored to a situation of continued growth of the European economies, with no real account taken of what would happen in the event of a slowdown, stagnation or recession. The mood expressed in the referendums and recent workers’ struggles also reflects dissatisfaction that the economic growth, jobs or higher living standards promised with the introduction of the euro have materialised.
The ruling classes attempted to impose an economic union in the absence of an existing political union. As we explained at the time, this has never succeeded in the past. Without a political union, moving towards the establishment of a unified nation state, an economic union or currency could not survive indefinitely.
When the “project” was on track the capitalists ignored the lessons of history. Now faced with today’s crisis, newspapers like the London Financial Times belatedly can warn that such contradictions cannot be reconciled indefinitely.
In an article which seriously questions the sustainability of the euro, Wolfgang Münchau pointed out: “All large-country monetary unions that did not turn into political unions eventually collapsed. The Latin Monetary Union of 1861-1920 collapsed partly because of a lack of fiscal discipline among its members – Italy, France, Belgium, Switzerland and Greece. A monetary union set up in 1873 between Sweden – which included Norway at the time – and Denmark failed as political circumstances changed. By contrast, Germany’s Zollverein, the 19th century customs union that developed into a monetary union, succeeded precisely because of the country’s political unification in 1871.” (Financial Times, London, 8 June 2005).
There is a vast difference between a federal state, such as the US, which can distribute funds to local state governments in a relatively easy fashion on the basis of an agreement and the EU. The distribution of resources or funds cannot be done in the same way, in a Europe composed of different nation states, as the current struggle over the EU budget shows.
The current EU crisis has revealed that the monetary union, rather than leading to a political union, has resulted in a political fracture between the national states. Partly, this is what lies behind the current spat over the EU budget, which was triggered by Chirac’s challenge to Britain’s rebate. This is a dangerous ploy, from the point of view of the French ruling class, because it has allowed Blair to raise the whole issue of the Common Agricultural Policy (CAP) in retaliation. France currently receives over 20% of farm subsidies from the CAP, which is a purely political decision to maintain support for the French bourgeoisie and Chirac amongst French farmers.
Chirac is attempting to use these issues to turn the underlying class vote of the referendum into a nationalistic conflict over the EU budget. Blair, dressed in the political gown of Thatcher, is also attempting to present himself as the nationalistic defender of Britain over the EU rebate. The German Chancellor, Gerhard Schröder, is aligning with Chirac, while his opponent in the forthcoming elections, Angela Merkel, from Christian Democratic Union (CDU), tends to support Blair. While some compromise on the budget is eventually likely this conflict illustrates the new increased national tensions and contradictions which are set to emerge in the coming months and years.
While an immediate collapse of the euro or the EU is not the most likely short term perspective, the sharp increase in political and economic tensions between the representatives of the various ruling classes will intensify. The conflict of interests is now driving the capitalists of Europe towards the establishment of a looser federation of national states which is contrary to the dominant tendency of the recent period.
However, the onset of a deep economic recession or slump or world financial crisis will sharpen these conflicts further and could provoke a relatively rapid collapse of the euro. The withdrawal of Britain from the ERM in 1992, on ‘Black Wednesday’ shows how diverging national economic conditions can drive the capitalist class of a country to break from a currency or monetary agreement. Although there are differences, and it will not be repeated in exactly the same way, the euro can break up, with one or more country withdrawing or even being expelled from it.
Even before the French and Dutch referendums, the question of the sustainability of the euro in the face of diverse growth and inflation rates was beginning to be discussed amongst capitalist’s strategists. At one private meeting, on May 25, involving the German Finance Minister, Hans Eichel, and Axel Weber, President of the Bundesbank, a representative from Morgan Stanley (an investment bank) Joachim Fels, expressed concern about the sustainability of the euro. According to the Financial Times even the extreme pro-EU lobby group, ‘Centre for European Policy Studies’ published a report in early June that raised the prospect of a collapse in the euro. (8 June, 2005).
(Extract from a 2005 CWI statement written at the time of an earlier crisis after a draft EU constitution was rejected in referendums in France and the Netherlands)
Extracts from UBS study “Euro break-up – the consequences”:
The economic cost for a “weak” country leaving the euro
The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak euro country leaving the Euro would incur a cost of around 9,500 to 11,500 euros per person in the exiting country during the first year. That cost would then probably amount to 3,000 to 4,000 euros per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.
The economic cost for a “stronger” country leaving the euro
Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around R6,000 to 8,000 euros for every German adult and child in the first year, and a range of 3,500 to 4,500 euros per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over 1,000 euros per person, in a single hit.
The political cost
The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.
