Fool's paradise at Davos
Even though Greece continues to edge closer to default, writes Eddie Ford, there has been yet more inaction by global 'leaders'
Over January 25-29 the international capitalist class, albeit without their top Chinese associates, had their annual chin-wag at the World Economic Forum in Davos. Afterwards, the European ‘section’ then flew off to Brussels on January 31 for yet another summit - the main items on the agenda being the problems of unemployment and economic growth, the finalisation of the new “fiscal compact” for the euro zone and the establishment of the European Stability Mechanism - the supposedly permanent bailout fund due to replace the unhappy European Financial Stability Facility in July.
The overall theme presented at Davos was that the global leaders were not panicking any more - just relax, guys. After all, things do not look so bleak now - do they? For example, constant intervention by the European Central Bank prevented another credit crunch/freeze, if not a catastrophic collapse of the euro. Just look at how the ECB kept buying up ‘distressed’ Italian government bonds, thereby driving the interest rate below the 7% critical threshold, or the way it dished out €498 billion in loans at the end of last year to European banks (at an average interest rate of 1% for three years) in a form of ‘quantitative easing’. You see, things could be worse.
And then, hey, look too at the latest official statistics for the last quarter of 2011 for the United States - projecting an annualised growth rate of 2.8%, up from the 1.8% of the previous quarter. OK, that was mainly due to businesses restocking, therefore heavily boosting the GDP figure by an extra 1.9%. But for those congregated at the WEF, it seems that any silver lining is better than none.
To use a common expression from Davos, they have somehow “muddled through” the euro crisis and now there are reasons to be cheerful again. However, for all the optimistic-sounding words, the crisis remains very real and still threatens to bust apart the euro zone.
The situation in Greece remains explosive. The government and its private creditors have still not come to a compromise arrangement over debt repayment and time is running out. Athens has to pay back €14.5 billion of debt by March 20, with money it does not have, as things stand now. If Greece is unable to make the payment, then it would be in default and in all likelihood would be forced out of the euro - probably sooner rather than later.
Although some myopically suggest that a Greek default need not necessarily be such a disaster, there is no doubt that such an eventuality would trigger a toxic chain reaction. Debt contagion would quickly spread into Portugal, Spain, Italy and, of course, France - given that its banks are exposed to dangerous levels of Greek debt. Lucas Papademos, the technocratic Greek prime minister parachuted in by an exasperated Brussels, darkly warned that the country faced the “spectre of bankruptcy” with “all the dire consequences that entails” - and held a post-midnight press conference in Brussels straight after the summit finished, saying that “everything will, and must, be finished by the end of the week”. Otherwise calamity looms. Yet, as the Weekly Worker goes to press, no deal has been done and Papademos has called for a “crisis meeting”, perhaps on February 2, to be conducted between himself and the European Union, ECB and International Monetary Fund troika.
Tensions are rising. Over the last week Greek officials have launched vociferous, behind-the-scenes attacks on EU and IMF negotiators, who are demanding even more severe austerity measures - squeeze more blood out of the workers - before sanctioning the next tranche of €130 billion of bailout money. But the price may be too high, even for a Greek technocratic administration which is desperate for some sort of resolution. The price is certainly too high for most MPs in the Greek parliament, including those who are members of the ‘interim’ or ‘national unity’ coalition government. With elections not far away, it would hardly be a vote-winner to be seen approving further wage cuts and reductions in the minimum wage. As one government aide put it, the troika “doesn’t appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses” - keep cutting and cutting - whilst no Greek political party is “willing to move either, saying wage cuts are a red line they are simply not going to cross”. Impasse.
Athens now finds itself at odds with both its private creditors and the troika - not to mention the working class. Private creditors are worried that the losses (‘haircut’) they are being asked to accept - a nominal 50% write-down in order to slice an estimated €100 billion from Greece’s overall €350 billion debt pile - will in fact end up being much larger: perhaps they will have to take a hit of 80% or more. And, as the Greek economy, thanks to the troika’s austerity regime, continues to nose-dive - perhaps to the point of extinction - then such fears are well-founded. Private investors may be many things, but they are not complete idiots.
In turn, the troika is becoming increasingly concerned that the country’s second bailout might have to be increased - with all the economic and political ramification that carries. For instance, Der Spiegel quoted a troika official as saying that Greece may well need €145 rather than €130 billion if it is to be “saved once and for all”. Similarly, the EU economic and monetary affairs commissioner, Olli Rehn, said last week that a “revised” analysis had shown that more rescue loans would be needed to make up for a “shortfall” in the second aid package. The extra money, he said, was required to ensure that Greece’s debt burden was reduced to 120% of GDP by 2020 - which he believes is “manageable”. More like a pipe-dream.
Of course, the heat in the Greek kitchen was considerably raised by a leaked, German-inspired EU proposal to install a colonial-style commissioner in Athens with veto powers over the Greek budget. According to the document, Athens’ inability to meet fiscal targets had made the new post a “precondition” of further rescue funds from the troika - as “budget consolidation has to be put under a strict steering and control system”. But, given the “disappointing compliance so far” from the Greek government, it was now time for it to “accept shifting budgetary sovereignty to the European level for a certain period of time”. The leaked document also stipulated that Athens must give “absolute priority to debt service” and agree to terms that make it impossible for Greece to “threaten lenders with default”.
Fury erupted. Anna Diamantopoulou, the Greek education minister and former EU commissioner, denounced the plan as the “product of a sick imagination” - what a humiliation for the country. Her sentiments were widely shared, and not just in Greece. Whether a conspiracy theory or not, some analysts have suggested that Germany deliberately produced such a document knowing full well that Athens could not accept such conditions, therefore acting to accelerate Greece’s departure from the euro and set an example to other ‘wayward’ and ‘irresponsible’ countries.
Meanwhile, quite predictably, the Greek economy is collapsing. Unemployment now stands at 19.2% and rising. Consumers suffering wage and pension cuts, rising inflation and a recession of a severity not seen since World War II, ensured that shops had one of their worst Christmases on record - with retail sales down 30% on the previous year. Since mid-2009, some 65,000 stores have been forced to shut down. Tough austerity measures, including a wave of new levies and tax increases demanded by the troika, have pushed another 50,000 to the point of bankruptcy. About 55,000 employees working in small and medium-sized enterprises - the mainstay of Greek enterprise - have lost their jobs, with many more to follow. And with the economy expected to contract by a further 6% this year, it is estimated that as many as half of the remaining 324,000 small and medium-sized enterprises will soon be forced to shut.
Yanis Varoufakis, who runs the department of economic policy at the University of Athens, told the BBC’s Today programme that the troika’s austerity plan was a doomed project - it would not work “even if god and his angels were to descend upon Athens and put them in place”. He is surely right. It is transparently obvious that Greece, asked to do the impossible, is heading for basket status.
Private creditors and the troika may be fighting over scraps in Athens, but the storm clouds gathering over the Iberian peninsular could make the ‘Greek question’ look like little more than a minor headache by comparison. Even though Portugal is already shielded by a €78 billion package from the troika and thus does not have to tap the markets this year, yields (interest rate) on Portuguese government 10-year bonds hit a fresh record of 17.38% as of January 30 - more than twice the level normally seen as sustainable.
The bonds came under particularly intense pressure from investors after Standard and Poor’s downgraded the country to “junk” status. Hence we read in a Reuters report that the ‘upfront’ payment required to buy €10 million of insurance on Portuguese debt hit a record high of €3.9 million on that date, a sure sign that investors were increasingly betting that the country will eventually have to ‘restructure’ its debt.
In the opinion of Citigroup, Portugal’s economy will contract by 5.7% this year and 3.5% next year - replicating the downward spiral seen in Greece, as austerity began to bite. While Portugal has so far delivered on its austerity promises, driving down living standards for the working class, the task confronting it is Sisyphean - a combined public and private debt of 360% of GDP, much higher than in Greece. Up until now, Europe’s leaders have vowed that they will not inflict a ‘haircut’ on Portugal’s creditors, insisting that Greece was a “special case” - never again. But the relentless exodus from Portuguese debt suggests that investors just do not believe them.
Then there is Spain, also entering bailout territory. Data released last week showed that GDP fell by 0.3% in the last three months of 2011 compared with the previous quarter - the first contraction in eight years. These figures followed statistics published on January 27, which showed that unemployment now stood at a staggering 5.3 million, putting the jobless rate at 22.8%. More than half of 16-24-year-olds in Spain are out of work. The rate is only set to worsen, as Mariano Rajoy’s People’s Party pursues a €40 billion ‘budget adjustment’, most of it in spending cuts, in order to meet the EU’s deficit reduction target of 4.4% this year.
The levels of unemployment, and general misery, in Spain are clearly reaching 1930s levels. Almost 1.5 million Spanish households now have no wage-earner, with 3.5 million people joining the dole queue over the past four and a half years. Furthermore, around 35,000 companies folded in the second half of last year - a third of all those to have shut since Spain’s economy started to run into serious trouble at the end of 2008. Much of the spending cuts have to come from regional governments, which provide basic services, such as health, education and welfare benefits. Spain is in danger of experiencing a social meltdown.
No wonder that we read that Rajoy has started to “quietly beg” the EU to ease up on its deficit targets, which are sending the country hurtling back into recession. Apparently, he has demanded greater “realism” from Brussels, but there are no signs that it is listening. Gloomily, in a Financial Times article by Wolfgang Münchau - the paper’s associate editor - he writes that Spain is “following the same path taken by Greece”, despite the fact that it has a “much healthier economy”. But, he continues, it also “has a problem” that Greece did not, which is a “deeply indebted private sector”, and that is the reason why a policy of “excessive deficit reduction could become so toxic”. He concludes by stating that if Spain “were to fall down a black hole”, then no rescue fund - however large - “would be able to drag it out”. A sober thought indeed.
Whilst the fool’s paradise at Davos was keen to promote the message that things can only get better - the wise rulers of the world will guarantee that - the half-day Brussels summit was characterised more by subdued bickering over the “fiscal pact”. All of the EU member-states finally endorsed the new compact except for the Czech Republic (“constitutional reasons”) and the UK, David Cameron citing “legal concerns” about the use of EU institutions in enforcing the fiscal treaty - though he has upset many of his Eurosceptic backbenchers by going quiet on the use of the veto, saying it was in Britain’s national interest for euro zone countries to “get on and sort out the mess that is the euro”.
The 25 leaders agreed to enshrine ‘balanced budget’ legislation into their national law, with annual structural deficits capped at 0.5% of GDP. There will be quasi-automatic sanctions on countries that breach the budget deficit limits, transgressors facing penalties of 0.1% of GDP - the fines being added to new ESM bailout fund. A rather ironic situation, you could argue, whereby countries are being provided with monies not only to pay for the normal running of government, but also their fines for fiscal indiscipline. The treaty also spells out an enhanced role for the European commission in scrutinising national budgets.
The Treaty on Stability, Coordination and Governance (SCG) will come into force once it has been passed by the parliaments of at least 12 countries that use the euro - qualified majority voting. Euro area leaders confirmed that they will “reassess” whether the EFSF/ESM has “sufficient” resources to meet any future crisis or ‘credit event’. They also committed themselves to a new drive to “stimulate growth” and “create employment” across the region, particularly for young people. Additionally, they also vowed to help small and medium enterprises get access to credit.
In many respects, the new SCG compact is a triumph for Germany - enshrining Berlin’s insistence on “rigour” and “discipline”, particularly with regard to the new punitive regime for budgetary profligacy. For the first time, as chancellor Angela Merkel wanted, of course, the treaty empowers the European Court of Justice as the enforcer of fiscal rectitude in the euro zone - not the individual member-states or their respective governments. All euro zone countries are now obliged to introduce binding legislation or constitutional amendments effectively abolishing governments’ rights to run their own economies in whatever way they see fit.
Concisely summing up the new fiscal deal in Europe, Merkel pronounced that the “debt brakes will be binding and valid forever”; from now on, “never will you be able to change them through a parliamentary majority”. Whoever you vote for, the EU bureaucracy wins. Merkel could not have made the fundamentally anti-democratic nature of the current EU set-up more clear: an elitist project run in the interests of capital at our expense. Not that genuine communists have any illusions in the ‘independent’ bourgeois nation-state: inside or outside the euro zone/SCG, or the EU, capital needs to attack the working class in order to salvage its system. A system that is suffering from chronic dysfunction.
All the evidence is that the banks and other financial institutions are hoarding cash - sitting on the money as the fiscal environment looks more and more dangerous. Perfectly rational, of course, for the viewpoint of the individual capitalist - totally advisable, in fact. But it is totally irrational for the system as a whole. The second great credit crunch remains a very real possibility.
1. The Guardian January 27.
2. Financial Times January 29.