At the very moment that Ireland was negotiating its rescue plan, the International Monetary Fund admitted that Greece would not be able to fulfil the plan that they and the European Union devised in April 2010. Greece’s debt would have to be restructured, even if they didn’t use this word. According to D. Strauss Khan, the boss of the IMF, Greece must be allowed to repay its debt not in 2015 but in 2024. That is, on the Twelfth of Never, given the course of the present crisis in Europe. Here is a perfect symbol of the fragility of some if not most European countries undermined by debt.
This concession to Greece has been accompanied by new austerity measures. After the austerity plan of April 2010 - which was financed by the non-payment of two months of retirement, the lowering of indemnities in the public sector, and price rises resulting from an increase in tax on electricity, petrol, alcohol, tobacco, etc - there are also plans to cut public employment.
A comparable scenario unfolded in Ireland where the workers were presented with a fourth austerity plan. In 2009 public sector wages were lowered between 5 and 15%, welfare payments were suppressed and recruitment frozen. The latest austerity plan includes reducing the minimum wage by 11.5%, reducing welfare payments, eliminating 24,750 state jobs and an increase in sales tax from 21 to 23%. For these two countries, these violent austerity plans presage future measures that will force the working class and the major part of the population into an unbearable poverty.
The incapacity of new countries (Portugal, Spain, etc) to pay their debts is shown by their attempt to avoid the consequences by adopting draconian austerity measures and preparing for more, like in Greece and Ireland.
What are the austerity plans trying to save?
Naturally, these policies are not intended to relieve the poverty of the millions who are the first to suffer the consequences. The bourgeoisie’s biggest fear is of a domino effect i.e. that if the weakest countries default, the effect will quickly spread throughout the system.
At the root of the bankruptcy of the Greek state is a considerable budget deficit due to an exorbitant mass of public spending (armaments in particular) that the fiscal resources of the country, weakened by the aggravation of the crisis in 2008, cannot finance. In Greece, it is clear that a country of 11 million people, whose GNP in 2009 was 164 billion euros, will not be able to pay back a loan of 85 billion euros. As for the Irish state, its banking system had accumulated a debt of 873% (ie nearly nine times!) GDP which the worsening of the crisis had made impossible to cover. As a consequence, the banking system had to be largely nationalised and the debt was transferred to the state. Accordingly, the Irish state found itself in 2010 with a public deficit corresponding to 32% of GDP!
In both cases, faced with an insane level of indebtedness of the state or of private institutions, it is the state which must assume the integrity of the national capital by showing its capacity to reimburse the debt and pay the interest on it.
The potential for a ‘domino effect’ lies in the fact that it is the banks of the major developed countries who held the colossal debts of the Greek and Irish states. There are different opinions concerning the level of the claims of the major world banks on the Irish state. Let’s take the ‘average’: “According to economic daily Les Echos de Lundi, French banks have a 21.1 billion euro exposure to Ireland, behind the German banks (46 billion), British (42.3 billion) and American (24.6 billion)”. And concerning the exposure of the banks by the situation in Greece: “The French institutions are the most exposed with 55 billion euros in assets. The Swiss banks have invested 46 billion, the Germans 31billion”. The non-bailout of Greece and Ireland would have put the creditor banks in a very difficult situation, and thus the states on which they depend. It would have been even more the case for countries in a critical financial situation (like Spain and Portugal) which are also exposed in Greece and Ireland and for whom such a situation would have proven fatal.
Worse, a failure to bailout Greece and Ireland would have unleashed a crisis of confidence and a stampede of the creditors away from these countries, guaranteeing bankruptcy of the weakest of them, the collapse of the euro and a financial storm that would make the failure of Lehman Brothers in 2008 look like a mild sea breeze. In other words, the financial authorities of the EU and the IMF came to the rescue of Greece and Ireland not to save these two states, still less the populations of these two countries, but to avoid the meltdown of the world financial system.
In reality, it is not only Greece, Ireland and a few other countries in the South of Europe whose financial situation has deteriorated. The following figures show the level of total debt as a percentage of GDP (January 2010): “470% for the UK and Japan, gold medals for total indebtedness; 360% for Spain; 320% for France, Italy and Switzerland; 300% for the US and 280% for Germany”.The levels of indebtedness of all these states show that their commitments exceed to an absurd degree their ability to pay. Calculations have been made which show that Greece needs a budget surplus of at least 16% - 17% to stabilise its public debt. In fact, all these countries are indebted to a point where their national production won’t allow the repayment of their debt.
In other words these states and private institutions hold debt that can never be honoured. Given that the rescue plans have no chance of success, what else is their significance?
Capitalism can only survive thanks to plans for permanent economic support
Nevertheless the Euro zone countries have another difficulty: its states are unable to create the monetary means to ‘finance’ their deficits. This is the exclusive preserve of the European Central Bank. Other countries like the UK and the US, equally indebted, do not have this problem since they have the authority to create their own money.
Such support to the financial sector, which finances the real economy, can reduce the impact of austerity which is why all those who are able to print money are doing so. The US is going furthest in this direction: Quantitative Easing Nº2, creating $900 billion.
The fact that the dollar is an international reserve currency allows the US to pump out dollars at a level that would cripple its rivals should they attempt such a strategy. A further round of ‘QE’ cannot be ruled out.
US fiscal and monetary measures are, therefore, far more aggressive than in European countries but even the US is now trying to drastically slash its budget deficit, as illustrated by Obama’s proposal to block the wages of federal employees. In fact one finds in every country in the world such contradictions revealed in the policies adopted.
The bourgeoisie has exceeded the limits of indebtedness that capitalism can sustain
As Marx showed, capitalism suffers genetically from a lack of outlets because the exploitation of labour power necessarily leads to the creation of a value greater than the outlay in wages, because the working class consumes much less than it produces. Up and till the end of the nineteenth century, the bourgeoisie had to offset this problem by the colonisation of non-capitalist areas where it forced the population, with various means, to buy the merchandise produced by its capital. The crises and wars of the twentieth century illustrate that this way of answering overproduction, inherent to capitalist exploitation, was reaching its limits. In other words, non-capitalist areas of the planet were no longer sufficient for the bourgeoisie to realise the surplus product that was needed for enlarged accumulation. The deregulation of the economy at the end of the 1960s, manifested in monetary crises and recessions, signified the quasi-absence of the extra capitalist markets as a means of absorbing the surplus capitalist production. The only solution henceforth has been the creation of an artificial market inflated by debt. It has allowed the bourgeoisie to sell to states, households and businesses without the latter having the real means to buy.
We have often shown that capitalism has used debt as a palliative to the crisis of overproduction that has ensnared it since the end of the 1960s. But we should not confuse debt with magic. Actually debt must be progressively reimbursed and the interest paid systematically, otherwise the creditor will not only stop lending but risk bankruptcy himself.
Now the situation of a growing number of European countries shows they can no long pay the part of the debt demanded by their creditors. In other words these countries must reduce their debt, in particular by cutting expenses, when 40 years of crisis have shown that the increase of the latter was an absolutely necessary condition to avoid a world recession. All states, to a greater or lesser degree are faced with the same insoluble contradiction.
The financial storms shaking Europe at the moment are thus the product of the fundamental contradictions of capitalism and illustrate the absolute impasse of this mode of production.
At the very moment when most countries have austerity plans that reduce internal demand, including for basic necessities, the price of agricultural raw materials has sharply increased. More than 100% for cotton in a year; more than 20% for wheat and maize between July 2009 and July 2010 and 16% for rice between April-June 2010 and the end of October 2010. Metals and oil went in a similar direction. Of course, climatic factors have a role in the evolution of the price of food products, but the increase is so general that other causes must be at play. All countries are preoccupied by the level of inflation that is increasing in their economies. Some examples from the ‘emerging countries’:
- Officially inflation in China reached an annual rate of 5.1% in November 2010 (in fact every specialist agrees that the real figures for inflation in this country is between 8 and 10%)
- In India inflation reached 8.6% in October
- In Russia it was 8.5% in 2010
The development of inflation is not an exotic phenomenon reserved for the emerging countries. The developed countries are more and more concerned: a 3.3% rate in November in the UK was seen as worrying by the government; 1.9% in virtuous Germany caused disquiet because it occurs alongside rapid growth.
Inflation is not always the result of vendors raising their prices because demand exceeds supply and therefore carries no risk of losing sales. The printing of money, that is the issuing of new money when the wealth of the national economy does not increase in the same proportion, leads inevitably to a depreciation of the money in circulation and thus to an increase in prices. This is the natural result of Quantitative Easing.
There is also the question of speculation. As profitable outlets decline, capitalists no longer invest directly in production that can tie up capital for long periods with little return. Instead, they keep capital liquid; ready to be invested in any activity that looks likely to make a profit. When prices of a particular asset or commodity begin to rise for any reason, the capitalists pour money into the market anticipating further price rises so they can sell at profit. For example, a bad wheat harvest suggests prices will rise so capitalists buy up large amounts of wheat hoping to make a killing. This very action pushes the prices up further, which encourages other capitalists to invest, pushing the price up even more! Increasing the money supply gives more cash to invest and accelerates the process even further.
The problem is that a good part of these products, in particular agricultural products, are also commodities consumed by vast numbers of workers, peasants, unemployed, etc. Consequently, as well as a lowering of income, a great part of the world population is hit by the rise in the price of rice, bread, clothes, etc.
Thus the crisis which obliges the bourgeoisie to save its banks by means of the creation of money leads the workers to suffer two attacks:
- the lowering of their wages
- the increase in the price of basic commodities
A similar process occurred in 2007 –2008 (just before the financial crisis) triggering hunger riots in many countries. The consequences of the present price explosion have immediately led to the revolts in Tunisia, Egypt and Algeria.
The level of inflation won’t stop rising. According to Cercle Finance from 7December, the rate of 10 year T bonds has increased from 2.94% to 3.17% and the rate of 30 year T bonds has increased from 4.25% to 4.425%. That clearly shows that the capitalists anticipate a loss of the value of the money they invest and thus demand a higher rate of return on it.
The tensions between national capitals
Contrary to the pious intentions published by the recent G20 in Seoul, protectionist tendencies are clearly at work today behind the euphemism of ‘economic patriotism’. It would be too tedious to list all the protectionist measures adopted by different countries. Let us simply mention that the US in September 2010 was taking 245 anti-dumping measures; that Mexico from March 2009 had taken 89 measures of commercial retaliation against the US and that China recently decided to drastically limit the exportation of its ‘rare earths’ needed for a lot of high technology products.
But, in the present period, it’s currency war which will be the major manifestation of trade war. Increasing the money supply also allows national capitals to make their products cheaper on the world market, another benefit to countries using this policy. Other countries like China, deliberately undervalue their currency to maintain exports.
However, despite the trade war, the different countries have agreed to prevent Greece and Ireland from defaulting on their debt. The bourgeoisie is obliged to take very contradictory measures, dictated by the total impasse of its system.
What solutions can the bourgeoisie propose?
Why, in the catastrophic situation of the world economy do we find articles entitled ‘Why growth will come’ or ‘The US wants to believe in the economic recovery’ ? Such headlines seek to maintain the illusion that the bourgeoisie’s economic and political authorities still have a certain mastery of the situation. In fact, the policy options available, in so far as they are effective, bring with them their own dangerous side effects:
- creating money can stimulate the economy and help reduce deficits (when these funds are directed to buying state bonds) but creates currency instability and unleashes dangerous inflationary trends.
- austerity measures can reduce debt and make the working class pay for the crisis, but they can also curtail economic activity and exacerbate the tendency for depression and breakdown, which actually makes the debt problem worse and necessitating further austerity. This is the situation Ireland now finds itself in.
In fact, many governments are pursuing both policies simultaneously in the hope that the effects of one will offset the negative effects of the other. Unfortunately, this often results in the worst of all worlds: ‘stagflation’ i.e. low growth plus inflation.
The only true solution to the capitalist impasse will emerge from the more and more numerous, massive and conscious struggles of the working class against the economic attacks of the bourgeoisie. It will lead naturally to the overthrow of this system whose principle contradiction is that of the production for profit and accumulation and not the satisfaction of human needs.