12.10.2011

Death by a thousand cuts

With the clock ticking on the euro zone and the UK in danger of slipping in another recession, there is still no sign of 'bold vision' or a 'comprehensive strategy' from the ruling class, argues Eddie Ford

It is not often that Marxists find themselves in agreement with the governor of the Bank of England. But we can only concur with Mervyn King’s sober comments on October 6 about Britain being in the grip of an economic crisis “as serious as anything since the 1930s, if not ever”.

King went on to comment on the “very unusual circumstances” of this situation - indeed, he argued, governments and the markets are now confronted by “problems even worse than at the height of the credit crunch”. For King, the world is now suffering from a “1930s-style shortage of money”. In turn, he argued, Britain is part of a world economy that is “closing down at an even faster rate than people thought even a few months ago”. Meaning that, as the United States and the euro zone possibly slide towards recession, UK plc will inevitably get dragged down with them - there can be no ‘recovery’ in one country.

‘Desperate’

Alarmed by the worsening situation, the Bank of England (BoE) announced that - as part of its so-called ‘shock and awe’ approach - it was injecting £75 billion into the ailing economy by a second dose of quantitative easing (QE2).

The first round in 2009-10 saw the creation of £200 billion in electronic money, a measure that George Osborne described at the time - when he was still a fiscal pin-up boy for the right - as the “last resort of a desperate government”. Meaning that by the end of the four-month programme, the BoE will have bought a total of £275 billion in assets from banks, representing around 20% of GDP. Many expect that the cumulative total resulting from quantitative easing will eventually reach £500 billion or even higher (though to date QE has acted more to fuel speculation in asset prices and thus helped push up the cost of energy and food). In the view of the majority on the BoE’s monetary policy committee, QE2 was necessary in order to stimulate demand, given the overwhelming evidence that the “underlying pace of activity had weakened”, and that the impact of Osborne’s austerity programme was “likely to continue to weigh on domestic spending” - namely, that the UK is on the verge of a double-dip recession.

This is a viewpoint certainly held by the credit rating agency, Moody’s, one of the terrible triumvirate alongside Standard and Poor’s and Fitch - the new horsemen of the financial apocalypse. The agency took the decision on October 11 to downgrade the part-nationalised Royal Bank of Scotland by two notches from Aa3 to A2 and also Lloyds TSB by one notch to from Aa3 to A1. Moody’s also cut its ratings on Santander UK, the Cooperative Bank, Nationwide and seven other smaller building societies. Explaining its decision, Moody’s said the downgrade was necessary because the government was stepping back from bailing out banks when they ran into difficulty - contending that it is “more likely now to allow smaller institutions to fail if they become financially troubled”. Will the UK itself be next for downgrading?

Now the RBS and Lloyds bosses, showing their deep love for the ordinary British taxpayers who bailed them out in their hour of need, are mounting a war against its poorest customers. With delicate sensitivity, Brian Hartzer, the head of RBS’s retail operation in the UK, informed the British public that from now on those customers with a basic bank account will be charged for using the cash machines of rival banks.

Meanwhile, the British economy is going from bad to worse - the coalition government has made sure of that. There is no alternative - only Plan A. Death or glory. Hence the latest official statistics and surveys make for particularly grim reading. Figures released on October 5 by the Office for National Statistics showed that the downturn of 2008-09 was even deeper than originally believed, with a 7.1% drop in GDP. Revising previous numbers, the ONS halved its GDP estimate for April-June this year to just 0.1%, suggesting the economy had already ground to a halt before the European debt crisis escalated in the summer. Additionally, household spending dropped 0.8% in the second quarter - its sharpest decline since the depths of the recession at the start of 2009.

If things were not bad enough, the ONS also reported that manufacturing output fell by 0.3% in August, slightly faster than the original forecast of a 0.2% fall. That left the annual pace of growth at 1.5%, the slowest for 18 months. The wider industrial sector, which makes up around 15% of the economy, saw output rise 0.2% in the same month, defying those who expected a 0.2% fall; however, the sector’s overall production rate was still down 1% on the year. Quite predictably, as revealed by recent business surveys, manufacturing as a whole is suffering from a fall in global demand, as key trading partners in the euro zone grapple with sovereign debt problems and their own sluggish or non-existent growth. So the latest quarterly survey from the British Chambers of Commerce of more than 6,000 businesses (October 11) showed them bracing for a “deterioration in the economic situation” in view of signs of “stagnation in the domestic economy”: that is, all the key indicators on the domestic market, exports, business confidence, cash-flow, investment in plant and machinery, etc have weakened over the last quarter.

Then, in yet another blow to the government’s crumbling economic ‘strategy’, the latest official figures released on October 12 showed that unemployment had reached a 17-year peak - rising by 114,000 between June and August to 2.57 million. The total for 16-24-year-olds hit a record high of 991,000 in the quarter - a jobless rate of 21.3%. Other figures showed a record cut in the number of part-time workers, down by 175,000, and there was also a record reduction of 74,000 in the number of over-65s in employment. According to the ONS, there are currently 9.35 million people aged from 16 to 64 classified as economically “inactive”. Taking all these statistics and surveys together, the only country which has suffered a worse recession is Japan - as Osborne had to admit on the BBC’s Today programme on October 7. No Plan B at all, George - really?

Well, perhaps a little one. He has told us that “further steps” would be taken to “boost” growth in his autumn statement next month - apparently, the treasury is “exploring further policy options”. One of them being the plan to lend money directly to businesses through ‘credit easing’, the scheme which Osborne announced at the Tory Party conference last week. Another idea being touted, for example, is putting a limit on how long construction firms can hoard land on which they have permission to build - they could now be required to release the land for someone else to build on. But all desperate piss-in-a-pot stuff, compared to the enormity of the economic/financial problems facing the UK.

Drop in the ocean

In reality, obviously, Britain is almost totally dependent on events in Europe - and just take a look at the continent. The euro zone seems to be dying the death of a thousand cuts. Yes, in the end Angela Merkel won with relative ease the vital September 29 Bundestag vote on whether to ramp up the European Financial Stability Facility mechanism - a ‘no’ vote would have delivered the death sentence to the euro zone project. Yet the vote has been rendered a near instant irrelevancy compared to the amount of money potentially needed to bail out those countries and banks which are clearly on the brink of collapse - trillions are required, not the paltry €440 billion which is the EFSF’s current lending facility. A drop in the vast ocean of debt.

The collapse, break-up and nationalisation of Dexia bank in Belgium is surely a taster of what is to come. Dexia asked for help for the second time in three years after a liquidity squeeze sent its shares tumbling - and the French, Belgian and Luxembourg governments into a panic. The bank is a repeat offender, having been initially bailed out in 2008 when the three governments jointly put in €6.4 billion to keep it afloat - dear god, please don’t go under. Under the emergency plan, Dexia’s French municipal finance operations will come under direct state control, whilst Luxembourg’s finance minister said a Qatari investment group was ready to buy the bank’s Luxembourg units. Dexia’s near-collapse should send-off klaxon alarms about the health, or otherwise, of Europe’s various lenders, given that it has an estimated global credit risk exposure of around $700 billion - twice the GDP of Greece, in other words. Now there is something serious to think about.

To those who appreciate gallows humour, the burden of bailing out Dexia led to a warning from Moody’s that it might downgrade Belgium - on the grounds that the government was overstretching. Quite possibly true. So damned if you do and damned if you don’t. Ominously, just hours after France and Belgium agreed to break up Dexia, Austria’s Erste announced it had also fallen victim to the “recent turbulence”. The banking group said it would lose as much as €800 million this year and would have to write down €180 million in euro zone sovereign debt. Another bailout on the horizon?

Plainly, the European banking/financial system is unravelling - decaying before our very eyes. There is even a chance that the EFSF will never even get to use its (utterly inadequate) €440 billion war chest - after the Slovakian parliament on October 11 voted against the bill to boost the powers and size of the bailout fund. Naturally, rejection of the proposal also triggered the collapse of the fragile four-party coalition which had ruled Slovakia since July last year. Slovakia has a population of 5.5 million, its GDP representing a mere 0.5% of the European Union’s, and was being asked to fork out €7.7 billion towards the EFSF pot - an amount equal to roughly 12% of its total annual economic output.

Of course, just like in Ireland, there will almost certainly be another vote - and the pressure will be on to vote ‘correctly’ this time. In all likelihood, by one means or another, the Slovakian parliament will eventually consent to the new mega-EFSF. But it is by no means a complete certainty and any further delay in ratifying the new EFSF mechanism could prove to be disastrous. The clock is ticking against the euro zone project. Greece is not going to magically go away and a ‘disorderly’ default by the Greek government could deliver an absolutely devastating blow to European banks, causing lending to freeze up.

Whither Greece?

‘Debt inspectors’ from the EU, International Monetary Fund and European Central Bank say they have reached agreement with the Greek government and that it is “likely” that the country will get its next tranche of €8 billion bailout cash by early November - assuming that the country is not already bankrupt by then. The Greek finance minister, Evangelos Venizelos, has sought to reassure nervous investors that the country has enough money to pay pensions, salaries and, far more importantly, bondholders through to mid-November - “no problem”, he bullishly declared upon returning from a euro zone finance ministers’ meeting in Luxembourg.

However, the EU, IMF and ECB troika also issued a statement saying that Greece will no longer reach its “fiscal target” for 2011, due to a regrettable drop in GDP and also because of “slippages” when it came to the carrying out of the “agreed measures” - ie, further assaults on the Greek working class. The statement added, on a note of perverse optimism, that the 2012 deficit target of €14.9 billion could still be met if there was a “determined implementation” of the government’s austerity programme and in this spirit praised the decision to end sector-wide collective labour agreements as a “major step forward”.

Robert Zoellick, president of the World Bank, told the German Wirtschaftswoche magazine on October 8 that there was a “total lack” of vision in Europe, with more leadership being particularly needed from Germany. He worried that the entire euro zone teeters on the verge of a “euroquake” if the Greek default is bungled, thus triggering off contagion on a vast scale - the effects of which would be felt around the entire world, especially the United States. In which case, forget recession - rather, say hello to the new great depression.

Over September 16-18, the IMF, World Bank and G20 finance ministers issued a series of resolute communiqués promising “bold action” to do “whatever necessary” to prevent Europe’s sovereign debt crisis from spinning totally out of control. Very impressive-sounding. Yet next to nothing has been done. Merkel and Nicolas Sarkozy met in Berlin for bilateral talks over the weekend of October 7-9, with bank recapitalisation supposedly at the top of the agenda - the two countries, we heard, were pursuing a “common course”. But how exactly are they going to do it? So far we have not been told. France, petrified of losing its triple-A credit rating, wants to spread the pain by using the EFSF, but Germany remains resistant to the idea - keen that the respective national governments should get their own wallets out.

Eyes are now turned towards the EU summit meeting in Brussels on October 23, originally scheduled for the week before. Yet another summit - more meetings about meetings. In upbeat mode, Herman Van Rompuy, the European Council president, asserted that on the day they would “finalise” their “comprehensive strategy”, allowing EU leaders to present their master plan for rescuing the euro zone to the G20 summit at Cannes on November 3-4. David Cameron, for one, hopes that the leaders take a “big bazooka” approach to resolving the euro zone crisis and finally bring to an end the chronic uncertainty, which is having a “chilling effect” on the world economy.

Few are convinced.