European Debt Crisis Latest Threat to Global System

The foremost symptom in the last month of the deepening global economic crisis has been the sovereign debt panic in Europe, a panic steadily increasing the odds of an explosion of the European Union and the death of the euro. The spillover would engulf the world, sinking to new depths a stagnant U.S. economy, as well as that of China and other “emerging” economies.

Meanwhile, the austerity programs being forced by bankers and the IMF on European governments had their counterpart in the U.S. in the Congressional “Supercommittee,” the bipartisan effort at meeting demands by the ruling class to cut the country’s deficits by slashing the social safety net for workers. Since the Supercommittee failed to reach consensus on a set of cuts and/or tax hikes, the legislatively mandated alternative of massive across-the-board cuts at arbitrarily set percentages will take place in 2013.

The European Union and its common currency, the euro, is a prime example of the contradictory phenomena inherently besetting the capitalist economic system—phenomena that actually explain far more of the system’s workings than simple greed.

The EU itself was a product of the global unevenness of the post-World War II period, in which the leading European powers, having lost their global dominance to the United States, realized they had to combine forces. Yet they could only do so on the basis of political states reflecting the particular interests of individual ruling classes. And each of the latter was torn between the desire to outcompete their European revivals and the need to collaborate with the latter against the U.S.

Needless to say, the strongest of these countries—Germany, France, and others in Northern Europe—succumbed far more often to the temptation to use the new continental unity to heighten their market dominance over their poorer Southern and Eastern European rivals.

The EU was built on a continent with wildly divergent levels of productivity, technical development, and levels of social spending. In prosperous times marginal efforts at unity were begun. But rather than harmonizing all parts of the country upward to prosperity, the EU became a way for its stronger members to deepen the dependency and subordination of the weaker by forcing open their markets, and taking advantage of cheaper labor (by migration of labor in one direction and capital in another).

But in a crisis it’s everyone for oneself. So although today’s rhetoric from the stronger countries blames the poorest countries for their alleged wastefulness, this is just a dodge to cover the EU’s failure in good times to overcome the centripetal forces acting against cross-national economic unity—forces now exacerbated by shrinking markets and vanishing investment opportunities.

The country that has benefited the most from imposition of a relatively common “free” market across Europe, Germany, is also the one least willing to yield its dominance or risk its own fiscal health to help its crisis-ridden neighbors. Instead, Germany, at least until the waves of the crisis began lapping at its own feet in recent days, has been lecturing its neighbors about the need for massive spending cuts and greater fiscal restraint.

This mantra is echoed by the IMF and European Central Bank figures, who portray the crisis as one of “sovereign debt,” i.e. the increasing inability of countries to find investors to buy the bonds that finance their shortfalls, thus supposedly requiring spending cuts to shrink their budget deficits. Lower wages and benefits are also recommended to increase these countries’ competitiveness, thus shrinking their trade imbalances. All of this, supposedly, will shrink their accumulated debt and make their bonds more investment-worthy.

But the alleged profligacy that put European governments in such situations, requiring them to take such remedial steps, is, when not an outright slander, merely a symptom—as was the supposed shortsightedness that led U.S. homebuyers to take out mortgages they couldn’t afford. In both cases, the underlying cause was a financialization of the global economy, encouraging if not forcing both consumers and governments to take on more and more debt to keep production going. That financialization in turn arose out of decades of falling rates of profit, coupled with increasing globalization as Western corporations fled further and deeper abroad to cut production costs.

It’s worth recalling that the allegations against these supposed deadbeats and spendthrifts, whether individual or governmental, are merely an echo of similar abuse hurled at Third World countries in the 1970s who had been bullied into taking on huge amounts of debt from Western banks, and then forced by the IMF and World Bank into austerity programs to squeeze value out of their workers to pay back these loans.

Now the IMF is playing the same role in Europe, openly exercising direct oversight of a growing number over the budgets of elected governments. The Wall Street Journal reported: “In the first steps toward the closer political and financial integration that many have come to believe is essential for the euro’s survival, the European Commission on Wednesday went beyond floating the idea of euro bonds. It also proposed that countries surrender more power over their finances to the European authorities, giving Brussels the right to request a rewrite of spending plans that seem too profligate.”

And not even the wealthiest on the continent are going to be immune from such pressures. On Nov. 16, the bond sell-offs that had been plaguing the southern tier of Europe hit some of its healthiest economies—e.g., Austria, the Netherlands, Finland, and France. One week later it was Germany’s turn. For months, said The Wall Street Journal, the worst-case scenario envisioned was that the crisis, “born in heavily indebted countries, would infect otherwise healthy countries at the heart of the monetary union.” That scenario is now being played out.

“If investors go on a buyers strike of European debt,” The Journal commented, that could raise borrowing costs and threaten the solvency of the euro zone, which in turn “could destabilize the global financial system and damage world-wide economic growth.” This would look something like the “buyers strike” after the demise of Lehman Brothers, when banks refused to loan to each other. Today the disease manifests itself in a different organ, but the cause is the same underlying malady.

On Nov. 23, The New York Times noted, “Germany’s stature as an island of stability in the European debt crisis was shaken when it fell far short of selling all the government bonds it put up for auction. Investors are beginning to question whether there are any havens left in Europe after German bonds got a surprisingly bad reception.” The failed sales, said The Times, also mean that Germany, which for months has been resisting EU-wide initiatives to help weaker economies, would have less prestige to dictate how the euro region will cope with the debt crisis.

The paper continued: “There is a growing sense in the region that unless the European Central Bank and big euro members like Germany and France agree to take major action to prop up the region’s finances, the euro-currency union itself could start to crumble. The debt crisis has toppled five governments, including Italy and Greece, by raising those countries’ borrowing costs to dangerously high levels. And now the crisis is prompting many investors to pull money out of the euro region altogether.

“Until now, Germany has been able to point to its solid economy and low debt as proof that public spending cuts—austerity—are the answer to the region’s debt crisis. And it has been the loudest opponent of proposals for the European Central Bank to help shore up weaker economies by serving as lender of last resort to national governments.” But, as The Times quoted another analyst predicting, “the failure of Germany and the European Central Bank to take significant steps to address the region’s debt crisis would mean ‘the risk of a euro breakup increases.’”

“Supercommittee” fails, cuts coming anyway

In the United States, the Supercommittee’s failure occurs against the backdrop of a still-stagnant economy, one in which corporations are still reluctant to invest, yet not at all reluctant to spend on their own executives’ well-being. The New York Times reported on Nov. 21 that companies laying off hundreds or thousands of workers were using huge piles of cash not to expand production, but instead to buy back their own stock—and in the process, given the hefty weight of stock bonuses in compensation packages, stuffing their executives’ pockets. After sliding since the outbreak of the financial crisis, buybacks have reached $445 billion already this year, the most since 2007, when repurchases peaked at $914 billion.

Even financial institutions, which bought back huge amounts of stock over the last decade at share prices far higher than they are today—and by doing so earned the wrath of many mainstream economists who asked why they weren’t investing such sums—have reverted to buybacks. JPMorgan Chase, for example, spent $4.4 billion repurchasing shares in the third quarter even as its stock fell more than 25 percent.

And the retreat back to speculative capital fantasyland goes on: On Nov. 3, social media giant Groupon held an $805 million initial public offering. On its first trading day the company was valued at $16.7 billion. Soon thereafter its stock price began to slide.

Meanwhile, back in the real world, several U.S. economic indicators were stable or showed little change in October, but one key index—orders for core capital goods, “a good proxy for business investment spending,” said The Times—experienced its sharpest drop since January.

The Wall Street Journal warned that the failure of the Supercommittee meant that at the same time as investors were wringing their hands over the European crisis, they had to turn anguished gazes across the ocean. Standard & Poor’s, which had already carried out an unprecedented cut in its U.S. rating on Aug. 5, warned that “downward pressure on the ratings could build” due to the Supercommittee’s failure, and Moody’s warned of a rating cut should Congress try to soften the mandated 2013 cuts.

In the same malevolent spirit, an economist at a French bank told The Wall Street Journal that those cuts are “the only thing standing between us and a [rating] downgrade.” And French bankers have good reason to be concerned about the fiscal health of the United States.

The high marks France has gotten until now from ratings agencies for its fiscal rectitude is slipping as it tries to keep Italy from going under. Fears of being pulled down by sinking swimmers, as France is now, is why Germany held out so long against providing assistance, and instead sternly demanded austerity from Greece and the weaker countries. But France borrows heavily in the United States to finance its own debt—and now U.S. banks fear coming losses from overexposure to France’s problems.

U.S. banks’ connections to European banks are paralleled by close ties of U.S. manufacturers: Automakers depend on sales in Europe for 30% of their output. The equivalent figures for household products is 17.5%, and for pharmaceuticals and biotechnology 15.5%. And, of course, U.S. manufacturers are just as tightly dependent on Asian producers and consumers—dangerous connections given the decreasing ability of the latter to sell to Europe. Instead of a rising tide lifting all boats, picture instead a treacherous chasm between two huge rocks, with several whirlpools shuttling careless boaters from one to the other shore.

Unions, organizations of the oppressed, antiwar groups, and the Occupy movement are all trying to grapple with how to resist the attacks on workers stemming from the above-described phenomena.

Certainly, one place to start is with the demand for opening the account books of the banks and corporations, and on that basis proving the justness of demands to cancel the debts of workers, students, and consumers (and of the public agencies that provide their social safety net, but are now being strangled by the banks). Organizations which for decades focused on demanding debt cancellation for Third World countries are finding an urgent need to raise the same demands in Europe—and in the U.S.

Certainly, the Occupy movement and its allies in labor and other movements are well positioned to take up these demands.

> The article above was written by Andrew Pollack, and first appeared in the December 2011 print edition of Socialist Action newspaper.