"[R]ather than achieving convergence, the euro has sharpened the differences between the national economies"
As on a rickety rollercoaster, the euro train could shoot off the rails at any moment. Will it be triggered by the soaring loop of the Spanish banking crisis? Or the crazy corkscrew of the Greek crisis, which will undoubtedly be sharpened by the 17 June elections?
The euro engineers tinker with the structure. But they spend most of their time arguing over the best design for a more perfect eurozone system. The Spanish banking crisis is the latest glitch – but it certainly won’t be the last.
In a costly, stopgap measure, the eurozone leaders have intervened to avert a collapse of the Spanish banking system. They have promised up to €100 billion to stabilise a number of banks which are effectively bankrupt.
The eurozone powers may have averted an immediate collapse of a number of Spanish banks, as well as preventing big losses to German and other banks that have loaned them millions. Yet already, ’financial markets’ – the big financial speculators – are gambling on the viral spread of the banking crisis, for a start to Italy and Cyprus.
Mariano Rajoy, the right-wing Spanish prime minister, is claiming a ’victory’. He is denying that this is another bailout, similar to the earlier bailouts of Greece, Ireland and Portugal. Though the conditions are not as harsh, it is in reality another bailout. The details have not yet been revealed. The money is intended to prop up the banks, but it will be channelled through the Spanishgovernment, which will be responsible for the debt.
Ultimately, it is Spanish workers who will be forced to pay off the banks’ bad debts. As in Ireland, the Spanish banks have accumulated enormous bad debts from the property bubble that burst after the global financial crisis in 2007-08. Nobody knows the actual amount, but it is estimated bad loans amount to over €200 billion.
Scattered around the cities of Spain, there are a huge number of half-finished and empty apartment blocks, witnesses to the crazy property bubble. At the same time, many Spanish families are facing eviction from their homes because they cannot afford to keep up their mortgage payments.
The Spanish government could not afford to bail out the whole banking system. Last month it was forced to intervene to effectively take over Bankia, a bank formed from the amalgamation of seven regional savings banks, so-called cajas. These banks were at the centre of the speculative property boom. They were heavily involved in corruption: they paid huge salaries and benefits to their top executives, while providing ’soft’, low interest loans to local politicians.
Rajoy’s government had to inject €4.5 billion into Bankia, but it is estimated that the bank requires another €19 billion to stay afloat. It is claimed that at least three other banks are in a similar situation.
The Spanish government could not find enough cash to prop up the banks. It currently has to pay an interest rate of over 6% on government bonds, issued to raise more funds. This compares with around 1.3% for German government bonds. In any case, most of the newly issued government bonds are actually being bought by Spanish banks. They can currently borrow money from the European Central Bank at about 1% interest rate. If they buy Spanish government bonds that pay 6%, they can clearly make a big profit.
But it is an absurd position where a government which is broke is borrowing from banks which are mostly broke. If the government defaults on its debts, the whole of the Spanish banking system would be wiped out.
This situation makes nonsense of Rajoy’s claim that the Spanish government did not need a bailout. In reality, Rajoy was holding out for more favourable terms. Although all the details are not clear, it is evident that Spain has been offered a huge loan (from either the European Financial Stability Facility or the European Stability Mechanism) to stabilise the banks.
This loan has not been accompanied by the harsh conditions that, for instance, were imposed on Ireland as the price for €85 billion bailout of the Irish banks. UnlikeGreece, Spain will not be subject to quarterly inspections by the troika – the European Central Bank, European Commission and the International Monetary Fund.
This concession by the German government and other eurozone leaders is partly recognition that Spain, the fourth largest eurozone economy, is ’too big to fail’. Moreover, they are fearful of undermining Rajoy as they need his government to contain the mass opposition.
In Brussels, Rajoy predicted that pushing through labour reform as part of the austerity package would ’cost him a general strike’. Within 100 days of his election a mass strike took place, with strikes and protests ongoing among miners, students and other sections of Spanish society.
With or without troika ’conditions’, Rajoy’s government has already begun to implement brutal austerity measures. Health, education and other social measures have been slashed. The 2012 budget includes cuts of €27 billion, with more to come next year. The government accepts that this will mean a further fall in gross domestic product, the third year of recession. This is reflected in unemployment of around 25%, with half of all young people out of work.
This is the first major intervention by the Troika since the anti-austerity votes in France and Greece in May. No doubt, behind the insistence that this not a bailout, are political fears by Spain’s ruling class.
Writing in April the Financial Times commentator Martin Wolf said: "perhaps the most important point to have emerged is that the crisis is subject to growing political risks. The fall of the Dutch government and the victory of François Hollande in the first round of the French presidential election demonstrate this point. The street might overwhelm the establishment."
George Osborne, the Con-Dem chancellor, has attacked the eurozone crisis for ’killing’ the recovery of the British economy. From outside the eurozone, Osborne and prime minister David Cameron have called for greater integration, without explaining how this will be achieved.
The prolonged stagnation of the eurozone economies is undoubtedly a factor in the continued recession in Britain. Continental Europe is the biggest market for British exports. But our home-grown cuts, inflicted by the Con-Dem government, are the biggest factor in the double-dip recession here. As in eurozone countries, the policy of savage austerity is undermining growth, which actually increases the burden of debt.
The global outlook for capitalism is dismal. Most of the advanced capitalist countries have not yet regained their pre-2007 peak levels of production. Workers’ living standards everywhere have been drastically reduced. The International Labour Organisation estimates that the world economic downturn since 2007 has thrown an additional 60 million workers into unemployment.
The weak growth in the US, the world’s biggest economy, is faltering. Between 10-15% of the export earnings of the top US companies come from Europe (50% in the case of cars), and these have been undermined by the European recession.
The Chinese economy, moreover, is slowing down. The government recently lowered interest rates and eased credit conditions in an attempt to stimulate growth. There is a huge accumulation of debt, especially from the property bubble that developed in recent years. It is far from certain that the Chinese regime will be able to repeat the kind of state-backed stimulus package that they implemented after 2008. India is slowing and Brazil, highly dependent on commodity exports to China, is also slowing down.
There are all the makings of a perfect storm in the global economy. A sharpening of the eurozone crisis (perhaps triggered by the outcome of the Greek elections on 17 June), a new recession in the US, or a downturn and political crisis in China could bring another downturn. This could be even more serious than the ’great recession’ that has followed the financial crisis of 2007/08.
The FT’s Martin Wolf, recently wrote that "the west is in a contained depression; worse, forces for another downswing are building, above all in the eurozone. Meanwhile policymakers are making huge errors."
By ’policy errors’ Wolf means the continued implementation of savage austerity measures in the face of stagnation and even recession, instead of measures to promote growth. He rightly says that the euro is, in some ways, similar to the gold standard between the two world wars: it imposes the huge burden of an overvalued currency on the weaker economies like Greece, Portugal, Spain, etc.
At the same time, stronger economies, in particular Germany, while benefiting from their position in the eurozone, have not been prepared to expand their economies and boost the market for other eurozone countries.
Wolf points to the uncertainty: "What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational… Before now, I had never really understood how the 1930s could happen. Now I do."
The future of the eurozone?
Global stock markets rose following news that the eurozone would be bailing out the Spanish banks. This uplift will be short-lived. Wealthy depositors are still moving their funds out of banks in Spain, Greece, etc, to ’safe havens’ such as Switzerland, the US and Britain. There has been a surge in the price of luxury housing in central London, as the super-rich from eurozone countries buy up assets in London.
The Spanish bank bailout will prove to be another temporary measure that will not resolve the underlying problems of either Spain or the eurozone. The German chancellor, Angela Merkel, is once again calling for ’more Europe’, with ’step-by-step’ moves towards fiscal and political union of countries using the euro.
However, if such steps could not be taken during a period of boom before the end of 2007, how will they be implemented in a period of stagnation or even slump? Rajoy himself illustrates the schizophrenic attitude of many eurozone leaders. Welcoming the new bailout funds, he has called for moves towards a political and fiscal union. Yet only a few weeks ago, he rejected the eurozone leaders’ debt-reduction targets on the basis of defending ’national sovereignty’.
The architects of the European Union had the illusion that they could overcome the national boundaries of capitalism and bring about an integration of the European economies. But rather than achieving convergence, the euro has sharpened the differences between the national economies.
Anger and resentment at austerity policies have led to the growth of nationalist forces and ultra-right trends, as for example in Greece with the resurgence of the neo-Nazi Golden Dawn party. Capitalism is increasingly based on the growth of the world market, yet at the same time it cannot overcome its national limitations. This is a basic contradiction of the capitalist system.
The capitalist crisis in Europe has been reflected in the massive movements of the working class that have been taking place, wave after wave. There have been massive public sector strikes, general strikes, mass occupations and protests.
Millions and millions of workers reject the policies of capitalist austerity, which mean mass unemployment, poverty, and the destruction of welfare services built up over decades. There is deep anger at the bailing out of the banks, which means that ultimately the working class is paying for the speculative losses of the banks, which made huge profits from the property boom.
Workers are questioning the legitimacy of the capitalist system. What is required is a clear alternative. This means for a start, taking over the banks, not merely to subsidise their losses but to reorganise the banking system to act in the interests of society. This would be the first step towards a socialist planned economy, run under workers’ democracy.
This should be approached on the basis of an international perspective, based on collaboration between workers throughout Europe and with the aim of building a European and global planned economy.