Greek Crisis Spills Over

By Andrew Pollack
Workers in Greece have launched repeated general strikes against the attempt by Europe’s rulers to make them pay the price of the country’s economic crisis, and have inspired workers throughout the continent – indeed, the world – facing similar attacks.
The price to be paid in return for the almost $1 trillion package worked out by the European Commission and the International Monetary Fund to “save” Greece includes freezing wages and pensions in the public sector for five years; massive public sector layoffs; hikes in regressive taxes; increases in the retirement age along with cuts in pension amounts; draconian cuts to spending for education, health care and other services, lower minimum salaries for youth and long-term unemployed; and greater deregulation of the economy and more privatization.
Talking of the “rescue package” for Greece, German journal Spiegel Online, said: “A European nation has hardly ever been expected to make comparable sacrifices in peacetime.”
A statement of support for Greek workers was issued by a wide spectrum of European Left groups, and another came from an equally broad range of the Left in the Asia-Pacific region. Proposals for Europe-wide or even global solidarity actions are being considered.
Such actions are clearly needed given the continent- and world-wide impact of the economic and political phenomena behind the crisis.
In a New York Times article headlined “Fears Intensify That Euro Crisis Could Snowball,” Harvard historian Niall Ferguson made no bones about the motivation behind the “rescue”: “This bailout wasn’t done to help the Greeks; it was done to help the French and German banks.”
The head of the Federal Reserve’s Minneapolis branch sounded the same note of self-interest in explaining the decision by the Fed to participate in the rescue: “We didn’t do so out of any special love for Europe. We’re American policy makers, and we make decisions to keep the American economy strong. The liquidity problems in European markets were showing signs of creating dangerous illiquidity problems in our own country’s financial markets.”
A top Federal Reserve official told Congress that Europe’s debt problems could cause a “significant external shock” to the US economy, harming its banks and exporters and stalling the supposed global recovery.
The downturn in stock markets despite the rescue package reflected persistent uncertainties, he said. Joining the bandwagon of those using the Greek crisis as proof of the need for cutbacks at home, he said the experience of debt-stricken European countries “is another reminder, if one were needed, that every country with sustained budget deficits and rising debt — including the US — needs to act in a timely manner to put in place a credible program for sustainable fiscal policies.”
The potential global spillover of the Greek events help explain why Barack Obama, as reported by David Marsh, chair of an international consulting company, in a New York Times op-ed, “telephoned German Chancellor Angela Merkel to warn her that Europe’s failure to act could set off another worldwide credit crunch.
“His intervention was incongruous in the extreme: an American president urging the German chancellor to shore up a currency union that was meant to bolster Europe’s financial independence from the US.”
This seeming incongruity was explained by Marsh himself when he noted that “ Germany failed to anticipate that the countries running a trade surplus [i.e. including Germany itself] would inevitably need to finance the southern states’ shortfalls. The five most heavily indebted euro members owe German banks an estimated 700 billion euros (nearly $900 billion), and these German surpluses, once regarded abroad as a symbol of great strength, have emerged as a dangerous source of vulnerability.”
(A similarly dangerous interdependence of course exists between China and the US.)
Mainstream media were full of charts showing the debts and trading deficits of Greece with bigger Southern European countries (Italy, Spain, Portugal), which in turn are in even greater debt to the biggest economies on the continent, France and Germany. And US banks hold nearly $200 billion in the bank debt of Spain, the country now in the sights of the world’s bankers.
This chain of debt occurs at a time when “the public finances in the majority of advanced industrial countries are in a worse state today than at any time since the industrial revolution,” said Willem Buiter, Citigroup’s top economist. “Restoring fiscal balance,” he added, “will be a drag on growth for years to come.”
By “drag on growth” Buiter is referring to the impact on demand of the austerity measures being imposed on Greece, measures which are already spreading to Spain and Portugal and are being threatened throughout the continent – and in the US [see related article on the US economy on this blog].
Fears of such stalled growth are heightened by the current spread of deflation. Prices are falling in both Europe and the US, a trend which both stifles demand and weakens government revenues.
The Wall Street Journal reported on May 20th that inflation in the US was at a 44-year low, hovering at just under 1%. Yet in a sign of “potentially troublesome unevenness in the global recovery, “Inflation has sped up in booming economies such as China and Brazil.” This, said the chief economist at Pierpoint Securities, means that such economies “are going to have to clamp down, which means they can’t sustain the type of demand growth they’ve had recently. That has implications for the US, Germany, Japan and any country that has exports into those countries.”
Radical economists challenged the central tenet of the supposed need for the austerity imposed on Greece: the country’s alleged outsized deficit. Socialist Project author Ingo Schmidt pointed out that “Public deficits between 12% and 13% of GDP in Britain and the US are bad, they say, but not so bad that the austerity measures they consider appropriate can’t be left to Number 10 Downing Street and the White House. But countries in southern Europe are labeled spendthrifts, and their deficits called a threat to private investments in government bonds and loans.”
He noted that European Union policy is decided by France and Germany, “the UK if she shows an interest, and the European Central Bank; all other European actors are more or less pawns in the game.”
Yet all EU members are bound by its rules – including use of the common currency, the euro, which means they cannot use devaluation as a short-term means of protecting a national currency and the production and trade dependent on it.
The result, Schmidt explains, is to leave the less-developed European countries in an even weaker competitive position with manufacturing behemoths such as Germany.
Schmidt noted that economists are already warning that the rescue package for Greece “may be insufficient to meet payments on all outstanding debt and that the targets for spending cuts being demanded will, instead of guaranteeing Greece’s solvency, lead to further economic collapse.”
Schmidt backed the call by many left forces in Greece for cancellation of the country’s debt. But instead, the strategy of the continent’s rulers “has been to blow up public deficit bubbles like the economic authorities blew up internet-, housing-, and resource-bubbles in the past. The difference is that the private sector bubbles of the past that led to the financial crisis could always rely on public sector bailouts. Now the bubble and the bailout are both expected to come from the same public purse.” To pay for them, “the Germans, the Greek government, the EU and the G20 now demand a ‘long war’ on the public sector.”
Spiegel Online echoed these worries about the shift of the locus of the crisis to the public sector. Citing similarities to the bankruptcy of Lehman Brothers, it stated: “The financial crisis isn’t over by a long shot, but has only entered a new phase. Today, the world is no longer threatened by the debts of banks but by the debts of governments, including debts which were run up rescuing banks just a year ago.
“The banking crisis has turned into a crisis of entire nations, and the subprime mortgage bubble into a government debt bubble… the same questions are being asked today, now that entire countries are at risk of collapse, as were being asked in the fall of 2008 when the banks were on the brink: How can the calamity be prevented without laying the ground for an even bigger disaster? Can a crisis based on debt be solved with even more debt? And who will actually rescue the rescuers in the end?”
Another radical economist, Hugo Radice, noted that mainstream economists never bothered to “explain why any particular limit to public deficits and debt was economically necessary. Instead… we are told that deficit cuts are necessary because international bond markets require them. So why do international bond markets require them? Because they think that cuts are necessary. And why is that? Because the economic experts say so!”
Radice added that deficit spending is actually crucial to stopping the global economy from crashing, as “countries with chronic trade surpluses, like Germany and China, depend in conditions of global recession on the willingness of other countries like the USA and Britain to continue to run trade deficits… Given the current reluctance of businesses and households in the trade-deficit countries to borrow and spend, it is their government borrowing that keeps the world economy going.”
Echoing arguments being made again today, IV author Robert Went noted in 1997 when the euro was being introduced that “One of the most cynical aspects of the whole business is that no economist can explain why a common currency can only function with budget deficits below 3%, or why deficits of 4 or 5, or even 6% are such an economic disaster.”
The crisis has also exposed the fragility of the EU project itself. In his 1968 “Europe and America” and his 1972 “Late Capitalism,” Ernest Mandel explained that building a multinational European political structure to effectively compete with the US and Japanese economies would only be possible if the continent’s ruling classes could, first, overcome the resistance of workers in each nation to a project which would make them pay the price for a Europe-wide leveling downward of historical gains in jobs, wages and services; and, second, if the international centralization of capital within Europe – as opposed to such a centralization linking US with German capital, or German with Japanese, etc., etc., (i.e. across continents) – made such a project both necessary and possible for European capital.
Repeated crises in the EU-building project, including the current one, have shown that neither condition has come anywhere close to being met. Thus, for instance, the chief global economist of HSBC could write that “’There is no longer a single cost of capital for the euro zone as a whole. It appears that nationality is increasingly having an impact on borrowing costs. So much for the single market” in the zone.
Similarly David Wessel pointed out in Canadian leftist journal “The Bullet” that although the EU has a single central bank, it has “no fiscal coordination or discipline, despite treaties that promise it.”
He too pointed to the recessionary impact of the rescue: “Can the world economy grow if everyone is trying simultaneously to cut government deficits and export more to pay the bills?” The last phrase is particularly telling, as few mainstream commentators trace the events back to the underlying crisis of profitability tied to global excess production capacity, which manifests itself in heightened trade tensions.
Progressive economist Mark Weisbrot also noted the medium-term irrationality of austerity, which “just pushes Greece deeper into recession, and doesn’t even make it more likely that they will pay off their debt in full.”
Of course the rulers calling for austerity can’t help themselves: capital needs the destruction of jobs and productive resources to get out of a crisis. And it must be applied one nation at a time given a system which, while increasingly globalized, is still rooted in the national economies and political structures which shape global economic competition.
Next Up: Spain – and Then?
After the rescue was announced, The Financial Times stated “It has belatedly dawned on Spaniards that the Iberian peninsula, not Greece, is the main target of the financial ‘bazooka’ unveiled by the European Union and the International Monetary Fund.” In an attempt to stop the bazooka from being fired, Spain’s social democratic Prime Minister José Zapatero announced a 5% pay cut for public employees, a wage freeze, the freezing of most pension payments, the elimination of the government subsidy for families with new babies, elimination of a program funding elder care and public funding for prescription drugs, and drastic cuts in public investment and aid to local governments. All this in a country with an official unemployment rate already over 20%, and sure to go higher as the impact of the austerity program kicks in.
On May 24th the IMF issued what the Wall Street Journal called an “unusually blunt warning” that Spain must radically overhaul its labor laws, slash government pensions and take other harsh measures.
Drastic cuts to pay and pensions were recently announced in Portugal and Romania, leading in the latter to mass rallies and plans for a general strike.
Meanwhile Germany’s ruling class, the main beneficiary in Europe of the “rescue” of Greece, is using the occasion to demand new austerity from its own working class, including cuts to kindergarten and preschool programs which Bavaria’s social affairs minister called social arson and “playing the lottery with our future.”
The head of the Bank of England told the newly-elected Tory-Liberal Democrat coalition government that there could be no delay in implementing a deficit-reduction program. Carl Bloice in the Black Commentator quoted Aljazaeera’s Andrew Wander who wrote, “Analysts say that this election [in the UK] will mark the dawn of an era of austerity unlike anything seen in the country for a generation, with higher taxes and drastic cuts in public spending… If Britain is not seen to be dealing with its mountain of debt, the country could lose its triple-A credit rating and with it the trust of the financial markets whose investment in government bonds keeps treasury coffers full.
“If that happens, the results could be even more harmful than a recession sparked by spending cuts; demand for UK bonds could collapse and the UK could end up facing a Greek-style cash flow crisis.” In other words, workers must pay the price demanded by the banks.
Obama’s top budget official sang the same song, calling for action to cut the deficit or “wind up facing the sorts of choices that Greece now faces.”
What Kind of European Unification?
Last June, François Sabado of France’s New Anticapitalist Party told an interviewer, “The crisis will rather accentuate the differences [between countries within the EU]. We can see that the structure of the economy in Europe… is heterogeneous and that what decides policy today is the defence of the interests of each ruling class, of the capitalist classes of each country. The German economy, for example, is trying to preserve its particular place, in the production of industrial equipment… On the other hand, countries like Austria – which is very exposed because of its investments and especially the loans granted to the countries of Central Europe, or Spain, which is especially committed concerning the debt of the countries of Latin America, do not have the same interests because of their different positions on the world market. So the crisis will tend to give rise to divergent reactions and thus to worsen the particular characteristics of each state… There is no coordination on a European scale, whether it is in banking, industry or regarding social policies.”
Sabado also exposed the hypocrisy of those who claim the public sector is bloated and that economic “facts” mandate cuts: “The massive rescue of the banks and the capacity of the capitalist states to inject hundreds of billions of euros into them have, in the space of a few days, made the arguments served up over two decades about the impossibility for the state to deal with the ‘deficits’ of public services lose all credibility. The interventionism of the state in favour of capital has appeared in broad daylight, and everyone can see it.
Speaking of tax shelters for financial capital, and how it is used to protect the balance sheets of manufacturing capital, Sabado explained that “This is a concrete example of the interpenetration between industrial and financial capitalism. It is because there is such interpenetration that you cannot attack financial capitalism without attacking the hard core of the multinationals, the capitalist system, in other words the search for maximum profit.” (This again contrasts with those, even among many radical economists, who overestimate what has been called the “financialization of capital.”)
The website of the Fourth International’s “International Viewpoint” documents the approach of that body over the decades as successive stages of European unification have been attempted. At each stage the FI has pointed out that such unification efforts have been carried out through cycles of cuts and austerity, and that convergence was designed to reinforce the dominance of the more developed countries while ratcheting down to a lower common level the living standards of the continent’s workers. Today’s crisis is only the latest stage in that process.
The FI’s 1995 World Congress declared that “Far from responding to the social and international aspirations of workers, women, youth and oppressed nationalities, the EU reflects on a regional level the globalization of the world economy. It is an instrument of the strongest sectors of big capital for inter-imperialist competition and for an all-out struggle against the European working class and the Third World. In current conditions, the EU means the dismantling of the Welfare State, the building of an imperialist fortress and progress towards a supra-national strong state.”
The FI has called, in counterposition to a bosses’ Europe, for continentwide mobilizations to raise all workers’ pay, benefits and rights, paid for at the bosses’ expense, and ultimately for a United Socialist States of Europe.