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Europe's toxic debt trap

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Marcus Lehner analyses Europe's debt crisis. Locating the cause in the vast overaccumulation of credit assets, he argues western government policy is serving the interests of finance capital, or, to be more specific, the owners of the vast debt mountains built up in the 'boom' years.

“Save Our Money", “Europe is Facing a Crash" and “National Bankruptcy is Looming", just a small selection from the books currently available about the “Euro". Various “experts", who are more or less nationalist, stir up the deepest fears of the German petty bourgeoisie about their “hard earned savings" which are supposedly being stuffed down the throats of the debtor states by irresponsible politicians. And it's not only “the Bild" that dresses this up with prejudiced ideas about “lazy Southerners". Of course, the apocalyptic visions of crashing banks and empty cash machines go alongside smart investment advice on where to put your endangered money - spreading panic can be good business.

It is clear who has benefited most so far from the Euro, German capital. Unlike the United States or Britain, German capital is not in a position to act first and foremost as finance capital, it depends significantly on the profit margins of its export industries (46% of all goods produced in Germany are exported). Therefore, the European Union, and even more the Eurozone, are kind of safe haven for German industry: 60% of all German exports are sold in the EU, and two thirds of that in the Eurozone. The fact that the export quota to the European Union could easily go down doesn't change this: the rise of the BRIC countries (Brazil, Russia, India, China) has brought new export markets but also strong competition that could also mean a loss of market share. As a result, the EU is even more essential as a safety zone around German capital, protecting it from this emerging competition on the world market.

On the other hand, the structural weakness of economies such as Greece, Portugal or Spain, as a result of the elimination of their independent currencies, means that the advantages of German capital produces a continual decline in their productive industries. This is made worse by the fact that they are also losing their former role as cheap production sites as German capital outsources production to the emerging markets outside the European Union.

As a result, chronic current account imbalances in the Eurozone are a constant source of economic tension. In addition, given interest rates are low in comparison to these states' economic potential, there is also a constant tendency to debt and its associated inflationary bubbles, for example, in the real estate sector. For German finance capital, this is a source of steady profits: financing the indebted economies ensures sales for the German export industries whose profits, in the form of investment capital, are then the basis for the next round of debts. The outcome is not only a constant flow of interest payments but also an increasing German grip on the governments of the debtor countries.

Contrary to how it is often presented, the Greek crisis that has been deepening since the beginning of 2010 has not meant any significant losses for German business. Certainly, there have been some losses as a result of declining exports but, in comparison to the overall scale of the Greek economy, these have not been serious. Even the loans that have been made to Greece as part of the “rescue package" have not meant any losses so far. In the last year, as part of the “rescue package", the German government has extended €8.4 billion in credits to Greece. On the basis of the interest rates, that remain high despite the supposed “special conditions", Athens has so far had to pay back, €500 million. (Financial Times Germany May 20) On top of that, the effect of the Greek crisis has been to lower the exchange rate of the euro as against the dollar, which has been very advantageous for German exporters.

The real problem is rather that, along with Greece, the entire system of indebted economies in the EU is faltering and a domino-like series of insolvencies in a number of states is not only threatening to bring these profitable business opportunities to an end but could actually threaten the creditor banks themselves. Combined with the ongoing banking crisis, this could lead to a new financial panic which would make the collapse of Lehman Bros look like childsplay.

The imperialist solution for Greece

In 2010, Greece had a state debt of 130% of its GDP which had itself declined by 4%. The austerity measures that have been introduced will have the effect of shrinking GDP still further so that by 2013 debt will have increased to over 150% of GDP. Unlike other highly indebted countries, such as, for example, the United States, Greek debt is largely foreign owned (the equivalent of 94.6% of GDP). The bailout for Greece organised by the “Troika” of the EU, the European Central Bank (ECB) and the International Monetary Fund (IMF) in the spring 2010 amounted to €110 billion but, by the end of 2010, this was seen to be insufficient: the time limit for loan repayment was extended by 4 1/2 years. In the meantime, it has become clear that Greece cannot escape from the downward spiral of recession and “rigour" and that this will lead to increasing resistance from all those who are victims in terms of wages, benefits and pensions. Therefore, the Troika is now discussing two possible solutions.

On the one hand, the Greek government will be forced to sell off state assets such as ports, airports and telephone companies. On the other, various schemes for “restructuring" are being considered. This could include a further extension of the loan period, partial cancellation of payments to creditors or interest payments (known for short as a “haircut") to cover some 30% of debt. This is laughable in that private investors have already factored in the possibility of such a loss so the 30% was accounted for long ago through higher interest rates. On the other hand, private creditors have already transferred their risky paper onto the taxpayers through the rescue packages of the EU and the ECB. So, despite the “participation of private creditors" it is quite clear who is not going to pay, although the absence of super profits for the large corporations is indeed an “imposition".

The crisis in Greece has led to speculation against the weak Euro countries, that is, their need for new credit (even just for the refinancing of old debts) is always met by higher interest demands. It makes no difference whether the debts resulted from weakness in balance of payments (as in Portugal, Spain, Italy, France) or from propping up “system relevant banks" (Ireland). The downgrading by the ratings agencies in this case is only an expression and recognition of already existing speculative movements.

After Ireland and Portugal fled to the protection of the EU “rescue package", other EU countries have become the focus for speculation: Spain, Italy, Belgium, Cyprus and Hungary. Even France and Britain are only slowly pulling themselves out of the crisis. Particularly in Britain, the austerity package is wreaking havoc on economic performance. On the winning side in the EU stand, to date, Germany, Austria, the Netherlands and Scandinavia. However, it is also clear that a wave of collapses in the crisis countries would quickly undermine stability in these countries as well.

The USA problem

The Euro crisis is linked to another, far more serious, debt crisis: that of the United States. The financial crisis of 2008 was not solved through the destruction of over accumulated fictitious capital. On the contrary, it was temporarily defused by the injection of a huge amount of new money. This “Quantitative Easing" strategy has meant that today the US central bank, the Fed, is the biggest holder of US Treasury bonds (and not China as is often wrongly said). In the past, this would have been called “cranking up the printing presses". On this basis, US debt has grown to over 100% of GDP as a result of rescue operations through economic programmes and the banks. As a result, since mid 2009, those with dollar assets to invest have been hyperactive in a growing wave of speculation in search of profits around the world. And, as in the sub-prime crisis, the most lucrative business is with high risk, poor debtors.

As the global economy appeared to weaken towards the end of 2010, the Fed decided, in November, on a second round of quantitative easing, QE2, a further extension of the policy of cheap money. But the consequences of inflation and new speculative bubbles (in raw materials, foodstuffs and state debts) are now so serious that the end of QE2 is increasingly likely. At the same time, any further increase in the deficit on the US state budget is increasingly difficult and the particularly high debts of US cities is threatening more and more medium-sized banks with bankruptcy. Indeed, this is seen by many commentators as the most important threat to the world economy as a whole. In short, investors are becoming increasingly anxious and the future of the dollar is even more uncertain than that of the euro.

Permanent crisis

Globally, during the 2008/9 financial crisis, $15 billion was spent to safeguard the banks. Since then, however, the risk structure of the banks, despite “stress tests", has hardly changed. Neither increases in the minimum reserve funds nor the Basel 3 rules (which are not yet operative) have made any real difference to the ability of banks with low capital financing highly speculative business. Today, once again, sums of money are invested on financial bets on a scale that is many times greater than global GDP. As a result, on the banks' books there are still any number of toxic deals for which there is only the vaguest hope of future sales. Moreover, as a result of this crisis management it is not only the “bad banks" but even the central banks that are now holding the worthless paper of bankrupt banks. Neither central banks nor states (whose debt to GDP ratio has increased on average from 60% to 80%) will be in a position to undertake such a banking salvage operation again.

In summary: a combination of state bankruptcies in the EU (or even a panicky “haircut”) with the end of QE2 in the US and a wave of bankruptcies in US banks would inevitably lead to a new crisis on the investment markets and at the major banks. And this would be in a situation where the States and central banks would no longer be able to come to the rescue. It is this horror scenario that is currently haunting investors, corporate executives and bankers as well as politicians. This explains both the hasty attempts to contain the hotspots in the European Union and the slow pace of dealing with the US debt problem.

The EU response

Amid a great fanfare, the EU constructed a “rescue package". First, in May 2010, the “European Financing Mechanism" by which it was believed that the problem could be resolved with €60 billion. As the devastating underestimation of the situation became clear at the end of 2010, this was strengthened with the “European Financial Stabilisation Facility" which added 440 billion from the EU and 250 billion from the IMF. Together with support for Greece €110 billion, altogether €860 billion have been put in the “pot". The construction of this system is full of inconsistency and ambiguity.

On the one hand, it is supposed to rescue the EU states from bankruptcy, on the other, however, it is not supposed to become a “transfer union" (in the sense of financial equalisation within countries) by which the structural origins of the problems (for example, productivity and social disparities) could be dealt with. The heart of the whole project is that the creditors of the Stabilisation Facility can now regularly supervise the “consolidation course" of the countries concerned through their own control mechanisms (the rich EU states, ECB, IMF). Put bluntly, it means the economic and social policies of the affected countries will, de facto, be dictated by the Troika. With regard to Greece, the Troika demands lowering wages and salaries, liberalisation of the labour market, reduction in the cost of the health sector, raising of the pension age. On top of that, they now want a programme of privatisations that would transfer the greater part of all state assets into a trust which would then sell them on. This classic neoliberal policy for debtor states, however, will not lead to any solution of the problem of indebtedness but to a further impoverishment of the economy and of the people of the affected countries.

This policy is an expression of the interests of the dominant capital in the EU. Neither the debtor countries nor the economic stability of the EU will be safeguarded by it. What will be safeguarded, above all, will be private capital and the profits of the creditor countries. On top of that, the petty bourgeois mass supporters of the ruling Conservative or Liberal parties in the creditor states will see their position more and more endangered by the debt crisis: that is what is driving the panic stricken and chauvinist rejection of any “transfer union" as well as the growing support for Eurosceptic, anti-rescue package currents in the bourgeois camp from Finland to Germany.

For the CDU/CSU/FDP government in Germany this is an almost crippling factor: on the one hand, it needs to express the long-term interests of German financial and export capital by securing the Eurozone but, on the other, it has to pander to the increasingly Euro sceptic and anti-transfer union sentiment amongst the mass of its supporters. What results from this is the confusion in the policy of the German government at EU level. As a result, the strongest economic power in the EU is not at present in a position to act as a stabilising force for example through a stronger coordination of economic and social policy within the EU. It is little wonder that German big business at present is thinking in terms of a Red-Green government of the Social Democrats and Greens.

Systemic solution?

However, in the framework of post-war politics, the outbreaks of crisis and their effects can no longer be managed precisely because the valorisation crisis of capital hinges on the essence of the capitalist economic system: property relations. The “invisible hand" of the market does not at all ensure the “common good" as Adam Smith believed. In reality, these invisible hands interfere in an ever more unbearable way in the lives of workers, youth, migrants, the poor, the old, women et cetera and publicly turn all governments into their puppets.

In their own way, the spontaneous youth protests, which have occupied the public squares in Spain for weeks, express this with their main slogan, the demand for “real democracy" because the elected politicians certainly have nothing more to say. In fact, it has rarely been so clear that a change of government in Ireland, Portugal or Greece really changes nothing in the policies that will be implemented: at the latest by the time of the next visit from the Troika all promises of a change of policy become valueless. Real change will only come when the problem is tackled at its roots and, as far as the European debt economy is concerned, this can only mean the expropriation of the banks and large-scale assets.

Such an expropriation of European banking and investment capital, together with the cancellation of debts, would create the room for a European economic plan democratically decided on by the masses which would overcome both the structural divergences within Europe and the problems of mass unemployment and increasing social poverty. It is obvious that this step is impossible without decisive class struggle against the ruling capitals in Europe and it can only be achieved in the context of the struggle for the United Socialist States of Europe. In this respect, there can be no solution of the capitalist crisis within the restrictive framework of nation states: the only solution is a socialist solution which is at the same time international.


The protests in Spain, Greece, Ireland and Portugal have so far been the most decisive and have raised ever more radical questions. The movement must become a pan-European movement and ultimately it must be coordinated.

Over the last decade, when we called repeatedly for the international coordination of the anti-capitalist movement at the “European Social Forum", we were often told that it was “too soon” for this. Then, when the crisis broke, there was a change of tone in the demoralised ESF, now we were told it was actually too late. In fact, in the face of the immense power of big capital that is closely coordinated internationally, any holding back from the task of coordinating the resistance movements internationally means organising their defeat, however democratic and progressive they may be. The mass strikes and the movements in southern Europe put the creation of a European wide coordination of resistance on the agenda today, this opportunity must not be wasted yet again.

The Arab revolutions show the enormous potential that exists today for fundamental changes, even for the overthrow of all exploitation and oppression. But they also show that only a political organisation with a clear programme for overcoming the dictatorship of capital and a preparedness to smash the bourgeois state can really bring an end to this criminal regime. Thus, there is no alternative to the building of a new, revolutionary, Fifth International that can finally put an end to this outmoded system.