June 2012 Euro summit: behind the illusions, another step towards disaster

On the morning of 29th June 2012, as if by magic, a gentle euphoria took hold of the politicians and leaders of the Eurozone. The bourgeois media and the economists soon joined them. Apparently, the Euro summit had taken some “historic decisions” - unlike the numerous decisions taken in the last few years, all of which have failed. But according to many commentators, this time it was different. The bourgeoisie of the Eurozone, for once united and solid, had taken the measures needed to get us through the tunnel of the crisis. For a moment you might have thought you had entered Alice’s Wonderland. But, once the morning mists had dissipated, and you looked a bit closer, the real questions came to light: what was the real content of this summit? What was its significance? Would it really bring a lasting solution to the crisis of the Eurozone and thus of the world economy?

The Euro summit: decisions that deceive the eye

If the June 2012 Euro summit was presented as “historic”, it is because it was supposed to be a turning point in the way that the authorities confront the euro crisis. To begin with, at the level of form, this summit, for the first time, did not, as far as the commentators were concerned, restrict itself to rubberstamping the decisions taken in advance by “Merkozy”, i.e. the Merkel-Sarkozy partnership (in reality the position of Merkel rubberstamped by Sarkozy).1 It now took into account the demands of two other important countries of the zone, Spain and Italy, demands supported by the new French president, François Hollande. Secondly, this summit is supposed to inaugurate a new given in economic and budgetary policy inside the zone: after years in which the only policy followed by the leading authorities of the Eurozone was one of increasingly ruthless austerity, now criticisms of this policy are being taken into account. These criticisms, raised above all by the politicians and economists of the left, argue that without reviving economic activity, hyper-indebted states will be unable to find the fiscal resources to pay off their debts.

This is why the “left” president Hollande, who had come to call for a “pact for employment and growth”, took centre stage in the whole show, proud of his demands and the results obtained. In this satisfaction he was accompanied by two men of the right: Monti the Italian head of government and Rajoy, his Spanish equivalent, who also argued that their calculations had paid off and the financial noose around their country’s necks should be loosened. The real situation was much too serious for these men to assume such a triumphant air, but at least they had a sense of humour: “we could hope to see the beginning of the end of leaving the tunnel of the crisis”. These were the convoluted words of the head of the Italian government.

Before lifting the veil from these optimistic declarations, we need to go back in time a bit. Let’s recall: over the last six months, the Eurozone has twice been in a situation where its banks were in a state of collapse. The first time this gave rise to what was called the LTRO (Long Term Refinancing Operation): the European Central Bank (ECB) accorded them loans of around 1000 billion euros. In reality 500 billion had already been supplied to them to keep them afloat. A few months later the same banks were again appealing for help! Let’s now tell a little story which shows us what is really happening in the world of European finance. At the beginning of 2012 sovereign debts (i.e. debts of states) exploded. The financial markets themselves raised the rates at which they were prepared to lend money to these states. Some of them, notably Spain, could no longer afford to look for loans on the market. It was all too expensive. At this point the Spanish banks gave up the ghost. What could be done? What could be done in Italy, Portugal and elsewhere? A brilliant idea began to germinate in the great minds of the ECB. We are going to make massive loans to the banks, who will themselves finance the sovereign debts of their national states and the “real” economy in the form of loans for investment or consumption. This is what happened last winter. The ECB declared “the bar is open and it’s drinks all round”. The result was that at the beginning of June everyone woke up with cirrhosis of the liver. The banks had not been lending out to the “real economy”. They had put the money in safe places, putting its equivalent away in the Central Bank for a small return of interest. What would they give to the Central Bank in exchange? State bonds which they had bought with the money they had got from the same Central Bank. A real conjuring trick which would soon be revealed as an absurd spectacle!

In June the “economic doctors” again cried loud and strong: the patients are slipping towards death. Radical measures were needed immediately for all the hospitals of the Eurozone. We now come to the June summit. After a whole night of negotiations, a “historic” agreement seemed to have been found. The decisions taken were:

• the financial stabilisation funds(European Funds for Financial Stability and the European Stability Mechanism) would now be able to flow into the banks, after obtaining the ECB’s agreement, as well as being used to buy up public debts in order to reduce the rates at which states would have to borrow on the financial markets;

• the Europeans would confer on the ECB the job of supervising the banking system of the Eurozone;

• an extension of the rules for controlling the public deficits of states in the zone;

• finally, to the great satisfaction of the economists and politicians of the “left”, a plan of 100 billion euros for reviving economic activity was drawn up.

For several days the same speeches rang out. The Eurozone had finally taken some good decisions. While Germany had succeeded in sticking to its “Golden Rule” in the matter of public expenditure (which demands that states adopt as a fundamental law the necessity to reduce their budget deficits), it at the same time accepted going towards the mutualisation and the monetisation of these debts, i.e. the possibility of reimbursing them by printing money.

As always in this kind of agreement, reality is hidden in the timetable and the way the decisions are put into practice. However, already on this particular morning, there was something very striking. An essential question seems to have been avoided: the financial means and their real sources. There was an unspoken agreement that Germany would end up paying for it all because it’s the only one that seems to have the means to do so. And then during the month of July, surprise surprise, everything was put into question. With the help of some legal manoeuvres, the application of the accords was put off until September at the earliest. There was a little problem. If you add up all of Germany’s commitments in terms of disguised guarantees and lines of credit, the total amount it’s being asked to hand out to its desperate European neighbours amounts to 1500 billion euros. Germany’s GDP is 2650 billion euros and this is without taking into account the contraction in its activity over the last few months. This is a dizzying sum equivalent to half its GDP. The last figures announced for the debt of the Eurozone went up to around 8000 billion, a large part of which is made up of “toxic” debts (i.e. debts where it has been recognised that they will never be repaid). It’s not hard to understand that Germany is incapable of assuring such a level of debt. Neither is it in a position, in the long term, to credibly shore up this wall of debt with its own signature alone on the financial markets. The proof of this can be seen in the paradox confronting an economy in disarray. In the short and middle term Germany is placing its debts at negative rates of interest. The buyers of this debt agree not to notice these ridiculous interests while losing capital through inflation. Germany’s sovereign debt appears to be a mountain refuge capable of withstanding all the storms, but at the same time, the price of insuring this debt is squeezing them at the same level as Greece! In the end this refuge will be shown to be rather vulnerable. The markets know very well that if Germany continues to finance the debt of the Eurozone, it will itself become insolvent and that is why all lenders are trying to get themselves insured as well as they can in case there is a brutal collapse.

There remains the temptation to use the ultimate weapon. That is, to say to the ECB that it should act like in the UK, Japan and the USA: “let’s print more and more bank notes without any regard for their value”. The central banks could indeed become “rotten” banks, that’s not the problem. The problem is to prevent everything coming to a halt. The problem is what happens tomorrow, next month, next year. This is the real advance made at the last European summit. But the ECB wasn’t listening with this ear. It’s true that this central bank doesn’t have the same autonomy as the other central banks of the world. It is linked to the different central banks of each nation in the zone, But is that the basic problem? If the ECB could operate like the central banks of Britain or the US, for example, would this do away with the insolvency of the banks and states of the Eurozone? What was going on at the same time in other countries, for example the USA?

Central banks more fragile than ever

While storm clouds gather over the American economy, why has the USA not yet come up with a third revival plan, a new phase of monetising its debt?

We should recall that the Director of the US central bank, Ben Bernanke, was nicknamed “Mr Helicopter”. In the last four years the USA has already had two plans of massive money creation, the famous “quantitative easing”. Mr Bernanke seemed to be able to fly all over the USA, doling out money wherever he went. A tidal wave of liquidities got everyone drunk. And yet it just didn’t seem to work. For the last few months a new phase of money-printing has become unavoidable. And yet it hasn’t happened. Quantitative Easing 3 is vital, indispensable, and at the same time impossible, as is the mutualisation and monetisation of the overall debt in the Eurozone. Capitalism has come to a dead-end. Even the world’s leading power can’t go on creating money out of nothing. Every debt needs to be paid for at some point or other. Like any other central bank, the US Federal Bank has two sources of finance which are at one moment or another linked and interdependent. The first consists of using up savings, the money which exists inside or outside the country, either through borrowing at tolerable rates, or through an increase in taxation. The second resides in the fabrication of money as a counterpart to the recognition of debts, notably by buying what is known as bonds representing public or state debt. The value of these bonds is in the last instance determined by the evaluation made by the financial markets. A used car is up for sale. Its price is displayed on the window-screen by the seller. Potential buyers verify the state of the vehicle. Offers are made and the seller chooses the least bad one for him. If the vehicle is too decrepit the price becomes derisory and the car is left to rot on the street. This little example shows the danger of a new money-creation in the US and elsewhere. For the last four years, hundreds of billions of dollars have been injected into the American economy without the slightest sign of recovery. Worse: the economic depression has been quietly advancing. Here we are at the heart of the problem. Assessing the real value of sovereign debt is connected to the solidity of the economy. Like the value of our car and its actual state. If a central bank (whether in the US, Japan, or the Eurozone) prints money to buy debts, or the recognition of debts, that can never be repaid (because the borrowers have become insolvent) it does nothing but inundate the market with bits of paper which don’t correspond to any real value because they have no counterpart or guarantees in terms of savings or new wealth. In other words, they are manufacturing fake money.

On the road to generalised recession

Such an assertion might still seem a bit exaggerated. And yet, this is what’s written in the Global Europe Anticipation Bulletin for January 2012: “To generate another dollar’s worth of growth, the USA will now have to borrow around 8 dollars. Or, if you prefer it the other way round: each dollar borrowed only generates 0.12. dollars of growth. This illustrates the absurdity of the medium term policies of the US FED and Treasury in the last few years. It’s like a war where you have to kill more and more soldiers to win less and less ground”. The proportion is no doubt not exactly the same for all the countries of the world. But the general tendency is the same. This is why the 100 billion euros set aside by the 29 June summit to finance growth is nothing but sticking plaster on a wooden leg. The profits obtained are increasingly pitiful compared to the growth in the wall of debt.

The well known comedy "Airplane" featured a passenger aircraft left without a pilot. As far as the world economy is concerned, we’d have to add “and the engine doesn’t work either”. That’s a plane and its passengers in a very bad situation.

In the face of this general debacle of the most developed countries, some, hoping to minimise the gravity of capitalism’s situation, point to the example of China and the “emerging” countries. Only a few months ago China was sold to us as the next locomotive of the world economy, with a little help from India and Brazil. What’s the reality here? These “motors” are also having some serious problems. On 13th July China officially announced a growth rate of 7.6%, which is the lowest figure for this country since the beginning of the current phase of the crisis. The times of double-digit growth are over. And even 7% doesn’t convince the specialists. They all know that it’s false. These experts prefer to look at other figures which they feel are more reliable. This is what was said that same day by a radio that specialises in economics (BFM): “by looking at the evolution of electricity consumption, you can deduce that China’s growth is actually around 2 or 3%. Or less than half the official figure”. At the beginning of this summer all the growth figures were at half-mast. Everywhere they are diminishing. The motor is more or less running on empty. The plane is about to sink to the earth, and the world economy with it.

Capitalism is entering period of major storms

Faced with the world recession and the financial state of the banks and states, there is open economic war between different sectors of the bourgeoisie. Boosting the economy with classic Keynesian policies (which require further state debt) can no longer be really effective. In the context of recession, the money collected by the states can only diminish and, despite the generalised austerity, their sovereign debts can only continue to explode, like in Greece or now Spain. The question that is tearing the bourgeoisie apart is this: “Do we risk once again raising the ceiling of debt?” More and more, money is not going towards production, investment or consumption. It’s no longer profitable. But the interest on debt and the need to repay it don’t go away. Capital will have to create more money to put off a generalised cessation of payment. Bernanke, head of the US central bank, and his counterpart Mario Draghi in the Eurozone, like all their cohorts across the planet, are hostages to the capitalist economy. Either they do nothing, in which case depression and bankruptcy will soon take the form of a cataclysm. Or they again inject massive amounts of money and that will very soon destroy the value of money. One thing is for sure: even if it can now see the danger, the bourgeoisie, hopelessly divided over these issues, will only react in situations of absolute emergency, at the last minute, and on an increasingly inadequate level. The crisis of capitalism which we have seen so openly since 2008 is only just beginning.

Tino (30.7.12)

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1. We should note that since this article was written, the French government has gone back to cooperating more with the German chancellor. Perhaps it would be better to start talking about “Merkhollande”? In any case in September 2012, the new President Hollande and the leadership of the French Socialist Party waged a campaign to force parliament’s hand and get it to vote for the Stability Pact (the “Golden Rule”) which as a candidate Hollande has promised to renegotiate. As Charles Pasqua, an old Gaullist veteran known for his cynicism, put it: “electoral promises only commit those who believe them”.