Facing the grim reaper
Everyone can see the danger of a crash, from the IMF to the Financial Times. But, asks Eddie Ford, where is the Marshall Plan or New Deal?
Over the last week there has been a further escalation in the crisis facing the euro zone, with the chances of Greece avoiding a default - whether orderly or disorderly - now seeming more unlikely than ever.
After a teleconference on September 20 between Greek ministers and the ‘troika’ of the International Monetary Fund, European Central Bank and European Union, it was announced that the ‘debt inspectors’ would return to Athens next week to resume their review of Greece’s austerity programme. This review had been suspended on September 2 in order to allow time, it was said, for Greek officials to present the inspectors with a draft of their budget proposals - “concrete facts and figures”. According to the Greek constitution, the government has to submit its 2012 draft budget to parliament on the first Monday in October and this plan will go to a vote by the end of that month.
An official statement told us that “good progress” had been made on September 20. But fear is spreading among Greek officials, and beyond, that they will fail the ‘inspection’ - deemed to be not cutting deep enough or fast enough. More pain needed. If so, this would severely jeopardise the chances of Greece receiving its next tranche of €8 billion as part of the overall €110 billion bailout package from the troika members. Should this money not be forthcoming by mid-October at the latest, then Greece faces imminent bankruptcy, with the government no longer able to pay public sector wages, pensions, etc.
So it is getting near crunch time for Greece - and perhaps the euro zone as a whole. If Greece defaulted, panic - and the dreaded contagion - would inevitably spread, which could sound the death-knell for the entire euro project. And without the euro what would be the point of the European Union? Clearly, the Eurocrats and the capitalist ruling class are facing the danger of a calamity.
Of course, the troika wants its pound in flesh Greece - and much more besides. That is, the Greek government must accelerate its privatisation programme and force through even more vicious cuts: get those books balanced. Either that or not get any more bailout money. Therefore Greece’s international creditors are demanding that 100,000 public sector workers be laid off by 2015, but also that pensions be cut immediately. Furthermore, another 50,000 state employees must have their pay slashed.
In other words, a perfect recipe for chaos and social unrest. Greek workers can barely afford to live as it is, while youth and students are particularly affected - the unemployment rate for those between 15 and 24 is 42.5%. Strikes, protests and resistance are breaking out everywhere. For instance, school students have recently staged demonstrations because of the shortage of text books at the start of the academic year - the government says it cannot find the €10 million it needs to print them. Additionally, 5,000 teachers’ posts are unfilled - it cannot afford to finance their salaries.
However, Greece is locked into a vicious circle - the austerity programme crippling any chance of economic growth. It is expected the economy will shrink by a minimum of 5.5% this year and will contract for a fourth consecutive year in 2012, primarily due to the cuts regime - tax revenues will be squeezed, as more demands are placed on social security spending. Absolutely predictable. Showing the extraordinary serious nature of the crisis facing Greece, finance minister Evangelos Venizelos announced on September 11 the imposition of an ‘emergency’ property tax - to be collected through electricity bills! Explaining this unorthodox method of tax-collecting, he frankly admitted it was the “only measure that can be enforced immediately”. Really showing his desperation, Venizelos also implored wealthy Greeks to do their ‘patriotic’ duty and pay their taxes.
But the euro project suffered another hammer blow on September 20, when Standard & Poor declared a “negative outlook” on Italy and downgraded its credit rating. S&P took the decision after lowering its annual growth forecast for Italy to just 0.7% between 2011 and 2014 and questioning whether Italy’s own austerity plan would deliver the €60 billion savings that the government is aiming for. Italy’s debt-to-GDP ratio currently stands at 120%.
Readers will know that Italy follows euro zone partners Spain, Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year. Outside of the financial press, events in the latter country have been curiously under-reported. Bluntly, Cyprus is now a basket case. Needless to say, the island has received several credit rating downgrades due to the exposure of its banks to toxic Greek debt. Almost incredibly, on July 11 a massive munitions explosion in a southern Cypriot naval base virtually destroyed a sizeable chunk of the island.
The blast knocked out the island’s largest power station, which supplies more than 50% of the national grid’s total electricity supply. Unsurprisingly, there was an instant energy crisis - which fed into, and deepened, the developing economic crisis. Rebuilding costs alone will be around €1 billion and the economy as a whole will be hit by two or three times that amount. Disaster loomed for the government, the only ‘official communist’ administration in the western world. The president of Cyprus is Dimitris Christofias, a Moscow-trained member of Akel (Progressive Party of Working People), which stands for an “independent, demilitarised and non-aligned” Cyprus and a “federal solution” to the Greek-Turkish divide.
In dire straits, Cyprus needed a bailout - and quick. Which it got. But not from the IMF or ECB, but rather from Russia. In fact, in the words of Russian finance minister Alexei Kudrin, it was a “friendly agreement with no strings attached” - in stark contrast to the onerous austerity and financial-sector reform measures demanded by the EU, IMF, etc of Cyprus’s euro zone neighbours. So the Cypriot newspaper, Phileleftheros, reported that Russia will bung Cyprus a €2.5 billion loan at an annual interest rate of just 4.5% - a good 10% below the market rate. It goes without saying that Moscow’s actions were not motivated by a spirit of pure altruism. Vast amounts of Russian oligarchy money is deposited in Cyprus, which - perhaps not coincidentally - is also a haven for money-laundering.
Out of control
There is a palpable fear that the world is edging towards another credit crunch. Again, like in the dark days of 2007-09, banks are refusing to lend to each other. Money is drying up. Scared stiff by the implications, on September 15 the world’s major central banks (Bank of England, US Federal Reserve, ECB, Swiss National Bank and Bank of Japan) announced that they will pump “unlimited amounts” of US dollars into European banks unable to access international money markets.
Sounds drastic - but is it enough? Events still seem to be slipping out of control, “unlimited” dollars or not. In an attempted display of leadership, US treasury secretary Tim Geithner flew to Poland on September 16 to attend the EU conference - yet another emergency summit. He emphasised Washington’s fears of a second “financial meltdown” and pressed for the €440 billion European Financial Stability Facility mechanism be scaled up. Reading the riot act, Geithner asserted that the EU needed to end “loose talk” about the break-up of the euro and work far more closely with the ECB on creating solutions - not to do so, he warned, posed a “catastrophic risk” to the financial markets.
Geithner’s message was echoed by senior IMF officials - who bluntly told the EU to get its “act together”. According to its latest estimates, the best we can expect from the economies of the developed world is “weak” and “bumpy expansion” - GDPs are predicted to expand at an “anaemic pace” of 1.5% in 2011 - even China’s growth rate is forecast to ease back slightly in 2012. Everything seems to be grinding to a halt.
The IMF blamed such factors as “major financial turbulence in the euro zone”. It also cited the Japanese tsunami and the rise in oil prices prompted by the unrest in north Africa and the Middle East as two of a “barrage of shocks” to hit the international economy in 2011. The IMF openly stated that the world risks being plunged back into recession, with policy-makers in the euro zone losing control of the sovereign debt crisis and the US economy taking a nose-dive as a result of “political impasse” in Washington, a “deteriorating housing market” or a slide in shares on Wall Street. Specifically, it expressed extreme anxiety about the US facing a “very sluggish recovery of employment” - presently unemployment stands at 9.1%.
Yes, president Barack Obama announced his $447 billion jobs package (the American Jobs Act) at the beginning of September and then on September 19 unveiled his plans to “kick-start” economic growth and cut the US deficit. He righteously declared his intention to save more than $3 trillion over the next decade, with roughly half coming from tax increases. This would involve, apparently, closing down loopholes and introducing a ‘Buffett rule’ - named after the billionaire speculator, Warren Buffett, who recently noted that he and his wealthy peers pay relatively less tax than the people who work for them. Obama suggested, in a possible threat to the American way of life, that those who earn more than $1 million a year should pay the same rate of tax as those who earn less.
Yet Obama, as he well knows, has absolutely no chance of getting his proposals through Congress. The Republican majority, driven semi-mad under Tea Party influence, have already accused him of outlining a blueprint for “class war” - denouncing his administration’s “insistence on raising taxes on job creators” and “pitting one group of Americans against another”, to use the words of John Boehner, the Republican speaker in the House of Representatives. Many of Obama’s most vociferous critics in Congress are already convinced that he is a crypto-Islamist-communist - and that was before the ‘Buffett rule’. In reality, of course, Obama is engaged in a process of political positioning for next year’s presidential elections - throwing down the gauntlet to the Republicans in a grand gesture. Meanwhile, unemployment and inequality reaches new heights in US society.
We have the same dismal picture in the UK. Unemployment now officially stands at over 2.5 million - the number of youth jobless having risen sharply by 78,000 to 973,000. The IMF has cut its growth forecast for Britain for the third time in nine months, and has warned chancellor George Osborne (remember when he was a fiscal wonderboy?) that further “underperformance” would warrant a policy U-turn - ease off on the cuts and try to stimulate growth. Osborne, naturally, has rejected any talk of a “plan B”, claiming that any change in strategy would undermine the government’s “credibility”. Curiously enough though, numerous reports are circulating that some ministers are “discussing” how to inject money into the ailing economy, arguing that up to £5 billion in extra capital spending could be used to finance various infrastructural projects - roads, railways, broadband, etc. But no plan B under George’s watch - never, never, never.
The Tory and Liberal Democrat ‘master plan’ is in tatters. Their expectation, or hope, was that by the time of the next election in 2014 there would be a roaring upturn. Meaning that the country had gone from pain to economic growth again, thus justifying the austerity measures and the coalition government’s whole raison d’être. Look, things are working and we can be generous again. This has already been shown to be totally illusory. Come the next general election, the Tories will hardly be popular, while the Liberal Democrats will be facing a wipe-out.
Everyone can see the danger of a crash, from the IMF to the Financial Times. But instead of solutions from authoritative leaders, there is only short-term expediency - no Marshall Plan no New Deal. Definitely no Keynes. Just walking in front of the train instead. What irrationality. This is tantamount to collective suicide, given the very real danger that in the next recession it will be countries going down - and dragging the banks and other financial institutions down with them.