Europe's mutual suicide pact
Austerity plans pursued by European governments are proving to be self-defeating, writes Eddie Ford
Looks like the phoney peace is over. As has been expected since the end of last year, France was stripped on January 13 of its precious triple-A credit status - held since 1975 - by the Standard and Poor’s rating agency. For president Nicolas Sarkozy this is clearly a huge political setback, if not a personal humiliation - given that he had spent most of 2011 saying he would fight “tooth and nail” to defend the country’s pristine credit rating and rushed through two big packages of budget cuts later in the year on that very basis. Pain without the gain.
France’s demotion was part of a mass downgrade of nine euro zone countries by S&P. It also deprived Austria of its triple-A and relegated Portugal and Cyprus to junk status - though that is more a question of why it took so long. Italy and Spain were demoted by two notches, whilst Slovakia and Slovenia were all cut by one notch. There was no change for Germany, the Netherlands, Ireland, Belgium, Estonia, Finland or Luxembourg.
Somewhat inevitably, S&P also cut the European Financial Stability Facility’s rating by one notch. Hardly astonishing, given that France and Austria account for some €180 billion of the credit guarantees underlining the €440 billion fund. Adding to the post-festive gloom, S&P warned that the EFSF’s rating would be reduced again if member-states’ creditworthiness were to erode further - which, of course, is very likely. Furthermore, logic strongly suggests that a score of European banks will be downgraded, or re-downgraded, in the coming week or so - reflecting the simple fact that their respective national governments are now seen as riskier bets.
It has been calculated that the French downgrade alone could reduce the EFSF’s lending capacity to a less impressive €293 billion. Bad news indeed, when you consider that it has already committed around €250 billion to Greece, Ireland and Portugal. And what if Italy starts to buckle under the debt strain? Obviously, the downgrade will make it even more difficult and more expensive for the EFSF to raise funds from financial markets and sovereign wealth funds. Some “big bazooka” the EFSF has turned out to be, trying to ‘leverage’ money out of nothing. A rescue fund that can rescue next to nothing.
At the end of the day, S&P’s judgement was merely an acknowledgement - or a symbolic indication - that the European economies are no longer gold-plated and the future of the euro itself is in serious doubt. Not exactly a blinding revelation. The euro zone has fallen into a spiral of downgrades, declining economic output, rising debt and further downgrades. In other words, the various ‘rescue plans’ concocted by the European leaders have proved to be totally inadequate, and the new year has only just begun.
S&P’s decision was met with a righteous howl of indignation. Olli Rehn, vice-president of the European Union commission, described it as “inconsistent” and made out that it ignored the supposedly “decisive action” taken by the euro zone countries to introduce a “new fiscal compact” at the December 7 summit meeting. The Lisbon government too complained that the two-notch downgrade to below investment grade was “ill-founded” and contained “serious inconsistencies” with the agency’s previous statements on Portugal.
Perhaps bucking the recent trend in German-French relations, Berlin tried to partially soften the blow to French pride. Thus Michael Fuchs, deputy leader of the Christian Democrats, declared that S&P was “out of order” and “must stop playing politics” - why pick on France? After all, if it was interested in being consistent or even-handed, then surely S&P should take action against the “highly indebted” Britain or United States.
More calmly, and for obvious reasons, French finance minister François Baroin sought to downplay things, saying the downgrade was “not a catastrophe”. True enough on one level. Such an eventuality had already been factored in by the markets, obviously aware that it was coming for some time - hence the interest rates on French government bonds rose by only a very modest degree. But the real significance of S&P’s move is that it starkly reveals an uncomfortable truth - that the course being pursued by virtually all European governments, including the UK, is disastrous. The austerity medicine is not working.
In justifying its decision, S&P pointed out that its assessment was “primarily driven by insufficient policy measures” by the EU leaders to “fully address systemic stresses”. A “reform process” based on fiscal austerity alone “risks becoming self-defeating” - on the grounds that domestic demand tends to fall “in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues”. That is, the very policies being so ardently pursued by the EU governments prevent the economy from growing, leaving governments no way to pay off the debt.
More colourfully, but no less accurately, the notable US economist and Nobel Prize recipient, Joseph Stiglitz, likened the EU austerity drive to the medieval practice of blood-letting - the patient almost certainly dies (The Daily Telegraph January 17). In his opinion, the European governments have signed a “mutual suicide pact” by opting for fiscal slash-and-burn - the result will not be a “return to confidence”, but “quite the contrary”: collapsing economies, not rejuvenated ones. For Stiglitz, as an orthodox Keynesian, austerity measures should only be imposed when an economy is booming, not waning. Instead, he maintains, the 700,000 public sector jobs lost in the US over the past four years have sucked demand from the system, as unemployment rises. And the UK is set to lose a similar number by 2017 - smart move. Same essential policies, same essential results. Economists like Stiglitz are not debating if the euro will break up, but how and when it will happen.
The response to such criticism was predictable. True to form, German chancellor Angela Merkel - worried that the so-called fiscal compact was being softened “here, there and everywhere” - called on euro zone governments to “speedily” implement the tough new fiscal rules. She also implored EU leaders to activate as “quickly as possible” the European Stability Mechanism, currently scheduled to succeed the EFSF by mid-year. But the EFSF kitty is almost empty, so the ESM, the supposed saviour of the euro zone, will inherit nothing.
Similarly, talking tough, the ECB criticised the draft of a new fiscal discipline treaty for the euro area, saying that the latest version amounted to a “substantial watering-down” of tough deficit levels that could allow “easy circumvention of the deficit rule” by struggling governments. Of course, ECB endorsement of the pact had been seen as absolutely crucial, since one of the main purposes of enshrining tough new debt and deficit rules - or so we were told - was to give the central bank more leeway to purchase the bonds of Italy and Spain: a licence to act more aggressively and lower the unsustainable high borrowing costs of those two countries.
But unless drastic action is taken, the chickens will come home to roost. Although Germany emerged unscathed this time from the stern judgement of the credit agencies, it too will come under increasing scrutiny, because its export-led growth is extremely vulnerable to a slowdown in the rest of the euro zone. Simultaneously, Berlin will now come under even more pressure to sign the cheques needed to keep monetary union in one piece.
Greek fault line
Yet the situation in Greece still has the potential to sabotage everything.
As the Weekly Worker goes to press, no deal has been struck between the technocratic government in Athens and its private creditors. Last-ditch negotiations were taking place, as officials from the IMF, EU and the ECB troika arrived to continue their ‘monitoring’ of the Greek government’s finances. Reaching such a deal is, of course, a precondition for Athens receiving the next chunk of bailout cash from the IMF and EU.
As things stand now, the talks in Athens involve creditors exchanging their existing Greek bonds with new ones of a lower value - taking a voluntary ‘haircut’ - with the bigger aim of cutting Greece’s debt by €100 billion. Once a deal has been done then, at least in theory, Greece will get its second tranche of €130 billion from the troika - who have insisted that they will not extend any more support if a bond swap deal is not agreed. If so, Greece would almost certainly default on its debt in late March - if not earlier - when a €14.5 billion bond repayment is due. Adding to the pressure on Greece, troika inspectors are demanding even “faster” cost-cutting reforms - keep attacking the working class.
According to Charles Dallara, the managing director of the Washington-based Institute of International Financial - which represents the global bond holders - the banks were “very surprised” at the stance taken by some unnamed officials representing both governments and multilateral institutions. “Some parties”, we read, had not “responded constructively” to the proposed 50% debt write-off. Some of Greece’s debts are rumoured to have been bought up on the cheap by so-called ‘vulture funds’ - speculators who specialise in pursuing troubled borrowers for payment in full. A common tactic of vulture funds is to veto agreements between distressed borrowers and their main lenders, in the hope of winning special treatment for their own loans.
However, the plot thickens. A Greek government source quoted by Reuters puts the blame on the IMF, which is apparently adamant that Greece pay just 4% interest on its debts as part of the deal - considered far too low by many lenders. Indeed, the financial press has carried reports that Greek debts are currently valued at only 20% of face value by bond markets, implying that the markets expect total losses to ultimately be 80% of the amount lent - and not the 50% currently under discussion. You can understand why some creditors are blanching at the thought.
The odds are that some sort of 11th-hour ‘debt restructuring’ deal will be struck - effectively giving Greece longer to repay its debts, as well as cutting the amount due. It may also contain a clause that prevents minority lenders, such as ‘vulture funds’, from vetoing future restructuring agreements. The hope is that Greece’s debt load will be reduced by 2020 from 160% to 120% of GDP - another eight years of austerity and negative growth. And this is the most optimistic scenario.
Clearly, Greece could still bring down the house of cards - it remains the euro zone’s fault line. If it were to default - not exactly an impossibility - that would be the first time in 60 years that a relatively advanced capitalist county has defaulted (leaving aside somewhere like Argentina). There would be an immediate effect on other countries and banks, which would all take a hit of some size or other. A Greek default would not just impact on the direct lenders, but throughout the whole parasitical, exploitative chain. Any sensible capitalist, or lender - not being charities - will have insured the loans against losses. Therefore a Greek default, or crisis, will ripple throughout the entire world capitalist system - throwing up all manner of unpredictable and dangerous consequences.
The standard complaint from rightwing economists and politicians is that some countries and parties are not sufficiently committed to pushing though ‘reforms’ - by which they mean attacking workers’ rights/conditions and in general rolling back (or ideally dismantling altogether) the gains of the 1950-60s.
Hence the constant attacks on “labour rigidities” and so on. The ruling class wants to make a bonfire of workers’ rights in Europe, with Greece and Italy paving the way. Naturally, there is no alternative course of action if we want to cut deficits and produce healthy, growing, economies - shorn of all waste and inefficiencies. Tough decisions have to be made.
But this has revealed itself to be an unpleasant fantasy. The economics of masochists. Recession is looming over Europe and not even Germany is immune. The same goes for the UK too, which, according to both the Ernst and Young Item Club and the Centre for Economics and Business Research, is “likely to already be in recession” - GDP shrank in the final quarter of last year and will fall again in the first three months of this year, they forecast. The Item Club dourly reported that “deteriorating” levels of confidence will see business investment “stagnate” in 2012, while export prospects have already slowed - thanks to the continuing crisis in the euro zone. And unemployment keeps spiking upwards. On January 18 the Office for National Statistics said it rose to 8.4%, the highest since January 1996 - another 118,000 were on the dole in the three months to November.
The figures support the picture of a totally flat UK economy. In which case, you would think - in the face of so much economic failure - the ‘new’ Labour Party of Ed Miliband would be taking up the cudgels against austerity and mapping out an alternative strategy for growth. But, criminally, we are getting no such thing - rather, just more of the same coalition medicine. Thanks for the kick in the teeth, brothers. In a speech to the Fabian Society on January 14 - then repeated in various interviews over the weekend - Ed Balls, the shadow chancellor, announced that he accepted the need for a freeze on public sector pay and that Labour would not make “any commitments” before the next election to reverse the coalition government’s tax rises or spending cuts. In fact, we discover, it is now “inevitable” that public sector pay restraint would have to “continue for longer in this parliament”.
Of course, not being a Tory, Balls said he would not have taken exactly the same approach to tackling the deficit, as Labour has always made the argument that cutting spending and raising taxes “too far and too fast risks making the economy and the deficit worse, not better”. But none of that detracts from the fact that the next Labour government will have to “deliver social justice in tougher times” - you just “cannot duck that reality”. And Ed ‘man of steel’ Balls would never do that - no way. Labour was committed to “balanced, but tough spending and budget discipline now and into the medium term” and “responsible capitalism” over the longer term.
Balls’ comments were endorsed by Ed Miliband - Labour must be a responsible alternative party of government, he said: a safe pair of hands for capitalism. Miliband even crowed about how David Cameron was “coming on to my ground” on issues such as taking on “vested interests” and “crony capitalism”. Vote Labour - and lose your job or pension.
Not exactly an inspiring message, so why bother voting for them at all? A point ably made by Mark Serwotka of the Public and Commercial Services union, who condemned the position outlined by Balls and Miliband as “hugely disappointing” - “instead of matching them on the cuts they should be articulating a clear alternative and speaking up for public sector workers and ordinary people in society”.
Only one problem though, at least for communists. How come Mark Serwotka is not straining every sinew trying to get the PCS affiliated to the Labour Party, where it can lead the fight against Balls’ plans?