28.09.2011

Euro storm clouds gather

World leaders are now frantically trying to cobble together a plan to prevent a catastrophic collapse of the euro zone, writes Eddie Ford. But it could be too little, too late

After months of vacillation and denial, reality is beginning to sink in. Genuine fear, if not panic, is spreading that the euro zone project is not far from total collapse and that the world is on the brink of a major recession - maybe even something far worse. Like a calamitous slump or depression on a scale unseen since the 1930s, when a traumatised Europe saw the rise of fascism and after that World War II. Without immediate and dramatic global action, the world could be convulsed by cascading defaults, bank runs, failed states, rampant unemployment, general immiseration and profound social unrest.

Perhaps summing up the Zeitgeist, Alessio Rastani, the now infamous stock market trader, almost cheerfully told a dumbfounded BBC News 24 presenter that that the euro zone is “toast” and that, apparently, nothing can be done about it - “Goldman Sachs rules the world”, not governments. He also admitted that he and his colleagues “dream” of moments like this, as the economic crisis - and possible complete crash of the banking/financial system - provides them with plenty of opportunities to make loads of money. Rastani also advised anxious viewers to “be prepared and act now” unless they want to watch their savings and investments disappear down the drain, though what he expects ordinary workers to do (set up their own hedge fund?) was left unstated.

Now, at the very last minute, there are frantic attempts to cobble together some sort of plan, any plan, to avert a catastrophic collapse of the euro - which would send the world spinning into chaos. Jean-Claude Trichet, head of the European Central Bank, urged government leaders to “demonstrate their sense of direction” and a spooked Barack Obama - terrified of the implications for an already recession-hit United States - declared that Europe’s financial crisis is “scaring the world” and that the actions taken so far by its leaders “haven’t been as quick as they need to be”. But there is an oppressive sense that events are running out of control and that it could all be too little, too late.

Greece is currently at the centre of the storm and the spectre of bankruptcy looms over the country. As the Weekly Worker goes to press, the International Monetary Fund, European Central Bank and the European Union troika have still not decided whether or not to release the next tranche of bailout money, waiting for its ‘debt inspectors’ to complete their “review” of Greece’s finances. If not, then the Greek government will run out cash as early as October 8 - finding itself unable to pay public-sector workers, pensions, etc.

Addressing business leaders in Berlin on September 27, Georgios Papandreou, the embattled prime minister, said Greece would “fulfil its obligations” and even hailed the country’s “superhuman” efforts to cut its budget - that is, further attack the working class. On the same day, in an act of appeasement to the troika, the Greek parliament voted to back the emergency property tax so as to plug an immediate €2 billion budget black hole. The tax will cost the average family €800-€1,500 a year, and will be collected through their electricity bills. With unemployment at 16% and average monthly wage at €650-€800, many Greek workers - whose purchasing power has been slashed since the crisis - will simply be unable or unwilling to pay this new tax; but if they do not, they run the risk of getting their electricity cut off. A whole raft of other brutal cuts and attacks are now in the pipeline, as part of Papandreou’s €27 billion “mid-term fiscal plan”.

However, for the government’s “superhuman” efforts to attack the Greek working class, none of this might be enough. Some workers still have a job of some description and others continue to draw a pension on non-starvation levels. Unacceptable to the troika, it seems. They have yet to be convinced that Athens can be relied on to impose ever more rounds of draconian cuts on an already bled-dry Greece. In other words, the message for Greece - and other ailing euro zone countries like Italy, Spain, Portugal and Ireland - seems to be: the medicine is not working; therefore take a double-dose of the very same medicine.

Over the weekend of September 16-18, the IMF, World Bank and G20 finance ministers issued a series of tough-sounding communiqués and statements promising “decisive action” and “bold action” to do “whatever necessary” to prevent Europe’s growing debt crisis taking a further nose-dive - the “phased” deadline for agreement on a rescue package for the euro zone will be the EU council meeting in Brussels at the end of October and the G20 government meeting in Cannes at the beginning of November.

The first “bold” and “decisive” proposal which is under “active consideration” is a 50% ‘haircut’ (write-down) of Greek sovereign debt - up from the original 21%, which drove down shares in Greek banks to a 19-year low. Or, to put it another way, they are preparing for an ‘orderly’ or ‘controlled’ Greek default on its €315 billion debt - despite George Osborne stupidly denying that there was any such plan.

Obviously though, if Greece was to default without sufficient back-stop support, the financial system could well freeze over and business ‘confidence’ would collapse, as it did after the implosion of Lehman Brothers three years ago. Banks would stop lending, trade would grind to a halt and another recession would inevitably result. For instance, French banks have lost 50% of their value over the last three months and have considerable amounts on money invested in Greece - hence they run the very real danger of taking a catastrophic hit from any possible Greek default. Indeed, they could be more or less wiped out, which would trigger an immediate economic and political crisis of seismic proportions.

Desperate

Therefore, there is increased talk about significantly enhancing the European Financial Stability Facility mechanism (bailout fund), given that its current lending capacity of €440 billion “pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders”, to use the words of IMF managing director Christine Lagarde. That requires a “big bang” plan to dramatically increase the size of the European bailout fund to tame financial markets and - in theory - bring the sovereign debt crisis under control. Meaning that the EFSF fund could be “leveraged” upwards to €1.5 trillion in loans from the ECB - some have even talked of €4.5 trillion.

Thus the EFSF will effectively be turned into a bank - which, armed with a pristine triple-A rating and access to virtually unlimited ECB capital, could lend money to countries and banks in trouble. Of course, if this were to happen, the EFSF would be doing quite something different from its original remit. Namely, from now it would take on the main risk of lending to those struggling to borrow from normal commercial sources, like the Italian government, and in the process its powers - both political and economic - would vastly increase.

Another logical element of the rescue package, if we are to believe what we read in the financial press, is for a massive recapitalisation of banks - or more bailouts, to be more direct. Banks holding large amounts of European sovereign debt have come under pressure from investors concerned about defaults. Thus the IMF has said it would “develop mechanisms” to assist “troubled” financial institutions working across national borders - and not just French banks, of course. UK banks may have comparatively smaller holdings of Greek bonds, but they too would face deep trouble if panic spread to Ireland and Spain. Furthermore, the ECB can lend to countries short-term by buying their bonds on the markets and if absolutely necessary could flood the euro zone with liquidity (ie, print money).

Some, particularly Nicolas Sarkozy, have also mooted the idea of bringing forward by a year the date (currently 2013) for turning the EFSF into a permanent European Stabilisation Mechanism and, ultimately, a European Monetary Fund. Then there is the great big elephant in the room - Eurobonds. Many investors, for obvious reasons, are keen for their introduction and on September 28 José Manuel Barroso, the head of the EU commission, logically argued that Eurobonds would be “advantageous” for “all” the member-states once the euro zone is “fully equipped with the instruments necessary to ensure both integration and discipline” - as necessity demands that “monetary union should be completed by economic union”. Forwards towards greater European integration or degenerate backwards to autarky and national currencies.

But all these plans could come to nothing. Opposition to the euro zone rescue package, insofar as you can call it that, is already developing - especially to the creation of an ‘über-EFSF’. Throwing a potential spanner into the works, Andreas Vosskuhle, head of Germany’s constitutional court, thundered in Frankfurter Allgemeine that politicians do not have the legal authority to sign away the “birthright” of the German people without their explicit consent. If Germany is intent on “giving up core powers” to the EU/EFSF/ESM, he argued, then the country “must give itself a new constitution” - meaning that a referendum “would be necessary”. Meanwhile, finance minister Wolfgang Schäuble said that any plan to leverage the EFSF fund up to €2 trillion was a “stupid idea” that would “endanger” Germany’s holy triple-A status. Standard and Poor’s has already hinted that Germany might lose its pristine rating if the euro zone rescue machinery is greatly expanded, asserting that there is “no cheap, risk-free leveraging option for the EFSF any more” and that all the various options under discussion have “potential credit implications”. Indeed, S&P went on, we have almost “run out of road” - so watch out, Germany: the good times of easy credit might be over.

Angela Merkel is confronted by a crucial vote in the Bundestag on September 29 over the original proposals to beef up the EFSF, up to and including the quadrupling of the fund. It is no exaggeration to say that a defeat for Merkel on this issue could signal the beginning of the end for the euro - and it could be a quick death. Unsurprisingly, a poll this month showed 76% of Germans are opposed to granting any further aid to Greece and are against the move to raise the country’s contributions to the EFSF pot. Raising the stakes, Merkel bluntly warned that German failure to assist Athens could result in a “domino effect” - contagion - which could rapidly spread throughout the euro zone. “We have to be able to put up a barrier,” Merkel told TV viewers, adding that she wanted Greece to keep the euro and remain within the euro zone. Not a popular message.

Merkel needs 311 of her coalition’s 330 MPs to vote for the EFSF and bailout if she is to command an absolute majority and not be reliant on votes from the opposition. Failure would almost certainly trigger a vote of no confidence and the possible collapse of her government - with the euro zone project possibly going down with her and the Christian Democratic Union-led government. And the parliamentary arithmetic is looking precarious for Merkel. Wolfgang Bosbach, the CDU MP who chairs the parliamentary committee on internal affairs, has stated that he will vote ‘no’ on September 29: “How are we going to deal in the long term with those states in the euro zone who are hopelessly indebted and are not in the position to finance themselves?” he asked. A good question.

Abyss?

Dark storm clouds are gathering everywhere. Yes, at the beginning of the week there was a surge in the markets, acting on the conviction - or desperate hope - that the EU leaders have a ‘master plan’ up their sleeves and will unveil the glorious details after the Bundestag has voted for the revamped bailout fund on September 29. Yet it goes without saying that if this ‘master plan’ reveals itself to be nothing of the sort - or if Merkel loses the votes on September 29 - then the markets will inevitably plunge downwards again, maybe into the abyss.

We now read in a study published on September 26 by the International Labour Organisation that the world’s major economies are heading for a “massive jobs shortfall” of at least 20 million by the end of next year if governments do not change their tack. India and China, the report said, were both “laggards” with less than 1% annual growth in total employment. The latest figures for other G20 countries show four with growth rates below 1% (Italy, France, South Africa and the United States), while two others (Japan and Spain) have seen a fall in total employment in the past year. Since the beginning of 2008, Spain, South Africa and the US have undergone the biggest falls in employment among the G20 countries. Spain and the United States also saw the biggest rises in unemployment rates, followed by Britain. At current rates, the ILO predicts, it would be “impossible” to recover them in the near term and there was a risk of the number doubling by the end of next year.

We are going towards permanent mass unemployment - a price worth paying, it seems, in order to balance the capitalist books. At the Labour Party conference, Ed Balls, the shadow chancellor, worried about Britain - and the world as a whole - entering a Japanese-style “lost decade” of economic stagnation. But the grim reality is that this is the most optimistic scenario on offer.

Whatever the case, Osborne’s plan has busted apart. A sick joke, in fact. The UK government borrowed more money this August than at the same time last year, with the Office for Budget Responsibility reporting that public sector net borrowing was £15.9 billion - £1.9 billion higher than in August 2010. Rising unemployment and diminished tax receipts made sure of that. So much for the nonsense about the coalition government ‘slashing the deficit’ and all the rest of it. All pain, no gain - with a second round of cuts to come: keep on taking the medicine that is doing you down.