From euro crisis to world crisis

FOR MORE than a year, European governments have been announcing a series of financial bailouts for Greece and other countries, only to return to crisis months or weeks later. Why can't they build the "firewall" that they keep promising?

THE PROBLEM for Europe is rooted in the fact that in the financial crash of 2008, the U.S. and European governments took on the debts of private financial institutions--the result of trillions of dollars in bailouts and the nationalization of insolvent banks and other companies.

The U.S. government used its control of both the Federal Reserve Bank and the Treasury to carry out its bailout program, so it could simply print more money to pay for it through technical maneuvers known as "quantitative easing." By contrast, the European Central Bank (ECB) isn't backed by any one government, though each European government moved to back up its own banking system.

As a result, tensions among eurozone members were bound erupt when the bill for the bailouts came due. As SocialistWorker.org noted nearly three years ago:

[W]hat's really going on here is competitive financial state capitalism, in which each nation-state steps in to protect its own banks and other financial institutions...What's more, the bank nationalizations will create other, long-term problems. The countries with the biggest economies can carry out these bailouts only by raising taxes and imposing austerity on the working class...Instead of selling stocks short, international investors will "short" entire countries, much as they did during the East Asian financial crisis of 1997-1998.

That turned out to be a fairly accurate prediction. Debt-burdened European governments--with Greece as the extreme example--are carrying out vicious cuts in social spending and imposing higher taxes on working people. These anti-worker policies are being carried out by governments of all political stripes. They aim to ensure that creditors--the big international banks, hedge funds, wealthy individuals and financial institutions--get their money back, no matter what the social cost.

Driving this austerity agenda is the German government, which presides over the biggest economy in the eurozone. Each bailout loan made to Greece, therefore, has come with increasingly severe conditions attached. Ireland and Portugal face less severe, but still devastating, cuts.

While German politicians complain that their tax money is being used to bail out "lazy" workers in other parts of Europe, the reality is that the bailout money only briefly passes through those countries on its way to the coffers of big German and French banks.

Essentially, the more powerful eurozone countries are trying to force the cost of the crisis onto the smaller and weaker nations.

But the crisis threatens Germany and France as well, since their banks hold billions of dollars in Greek government debt and are badly undercapitalized. According to the Bank for International Settlements, French banks hold $56.7 billion in Greek debt, both from the government and government debts. German banks hold $22.7 billion in Greek government bonds, which makes them vulnerable to a default. Indeed, a number of leading European banks could go bust if Greece defaults on its loans.

Big eurozone governments in Spain, Italy and France have looming debt problems, too. There's not nearly enough money in the new $600 billion European Financial Stability Facility (EFSF) to back up government bonds in those countries, let alone bail out the banks.

WHY HASN'T austerity worked, at least for the capitalists?

GREECE, A country of just 11 million people, simply can't afford to pay nearly half a trillion dollars in debt. Under the terns of the initial bailout in May 2010, Greece has already seen its economy actually shrink for three consecutive years as the result of staggering cuts in public sector workers pay, tax increases and government budget cuts. In the second quarter of 2011, the Greek economy declined a stunning 7.3 percent over the previous year.

Further austerity threatens a kind of social retrogression unseen outside of wartime. And the economy would contract even further, making the debt burden still higher. That's why holders of Greek government bonds are increasingly skeptical that they will ever see even a fraction of their money.

The second bailout of Greece, a $110 billion deal negotiated by eurozone countries and the IMF in July, was supposed to ease the burden by offering Greece the ability to sell government bonds at far lower interest rates.

But now that deal is widely seen as inadequate even before it goes into effect. In any case, the so-called troika--the IMF, the ECB and the European Union--contended that Greece hasn't yet met the austerity conditions of the first bailout of $150 billion, and threatened to hold back an $11 billion part of that loan until the Greek government voted through yet more cuts. The Greek government obliged, passing another austerity package on October 2 that will eliminate 30,000 public-sector jobs--a huge number in a country of Greece's size. Even so, the budget cuts still aren't severe enough to satisfy the troika.

WHY ARE Greece's problems spreading to other parts of Europe?

IF GREECE defaults on its debts--even if in a "controlled" fashion--it could blow a hole in the balance sheets of European banks, forcing governments to bail them out. Financial speculators would almost certainly drive up the cost of borrowing for other eurozone governments as well. And if Greece leaves the euro, the banks would face a far bigger blowout--and the entire eurozone could unravel amid economic and political chaos.

All this presents European governments with a dilemma. One option is to allow Greece--and potentially other countries--to default on their debts, risking a banking catastrophe. The other is to pony up trillions of dollars more in bailout funds--a move that's highly unpopular in Germany and other rich eurozone countries. A prominent German banker resigned from the ECB to protest the bank's purchase of Greek government bonds, calling it a backdoor bailout carried out with German taxpayers' money.

The policy paralysis was on display at the September meeting of the IMF, where the U.S. and other governments demanded that the Europeans come up with the money to fund a new, multitrillion-dollar bailout plan.

Several schemes have been proposed that would allow the European bailout fund, the EFSF, to borrow money from the European Central Banks, governments and private investors. This would give the EFSF the leverage to carry out far greater bailouts in the future--helping banks weather the almost certain Greek default and propping up Spain, for example. A souped-up EFSF would also avoid democratic control of eurozone governments, giving the euro-bureaucrats a freer hand.

But this measure wouldn't end the problem of mounting debt. On the contrary, it would add tremendous sums to the debt problem by piling the risk onto a single entity, the EFSF.

Some propose turning the EFSF into an insurance company or a collateralized debt obligation (CDO), one of the financial instruments that caused mayhem in the crash of 2008. If it became a CDO, the EFSF could then borrow money itself in order to expand its resources to as much as $3 trillion, the amount needed to bail out governments and big European banks.

But European taxpayers would still be on the hook, since the EFSF ultimately depends on the European Central Bank and eurozone governments as a financial backstop--the same governments that are burdened with debt in the first place. As Wolfgang Münchau of the Financial Times put it: "This is the equivalent of putting explosives into a can, before kicking it down the road...A CDO is not a solution to the crisis. It is the last confidence trick in the toolbox of the truly desperate. The eurozone is about to kick the can a final time."

The eurozone governments have given themselves an informal deadline to come up with a plan by the Group of 20 international summit in France in early November. But the crisis could well intensify before then, with a Greek default, for example, or a run on one or more big banks.

WHAT IMPACT will this crisis have on the world economy?

A CRACKUP of the euro would immediately go global, because there aren't separate European, U.S. and Asian financial systems, but an international one. Banks in Europe and the U.S. are closely interconnected.

But even without a total meltdown of the euro, the crisis is weighing down a world economy that's already on the edge of recession. The trillions of dollars in stimulus spending internationally in 2009 staved off world economic collapse, but only postponed the day of reckoning.

In the U.S., stimulus spending prevented a total collapse of consumer demand, but wasn't enough to spur sustained investment and job creation--and now economic growth has slowed to a crawl. The biggest share of world economic growth has come from the so-called BRIC countries--Brazil, Russia, India and China, along with a number of developing nations.

But while big stimulus spending by the Chinese government maintained high rates of growth over the past couple of years, the pace is now slowing. This deprives the world economy of a key engine just as the euro crisis threatens to cause an international credit crunch.

WHAT WILL be the political fallout of the euro crisis?

ECONOMIC VOLATILITY and class polarization will lead to sharp political swings in Europe. Far-right parties, such as the True Finns and the French National Front, have made headway in elections and in opinion polls on the basis of an anti-European, nationalist appeal.

Incumbent parties are likely to pay the biggest political price. In France, the center-left Socialist Party won control of the French Senate for the first time in decades, and French President Nicholas Sarkozy, a conservative, is highly unpopular. In Spain, however, the ruling center-left party is expected to be wiped out by conservatives in a parliamentary elections set for November. In Italy, Silvio Berlusconi, a conservative media magnate beset by multiple personal and financial scandals, is hanging on to power by a thread.

At the same time, the unions, the social movements and the left are trying to forge a sustained and unified resistance. Greece has seen 14 general strikes in less than two years, and general strikes have also taken place in Portugal and Spain. Last year, France experienced its biggest strike movement since May 1968. Britain's biggest-ever public sector strike earlier this year followed a mass student revolt last year--and a riot against racist police violence this summer.

Given the severity of the European crisis and intensity of the austerity drive, the level of working class struggle will have to be even higher in order to prevail. Independent left politics will be crucial, too, since labor and social democratic parties have used their ties to the labor movement to push austerity and contain the struggle.

The euro crisis has highlighted the ideological crisis of the system. The happy talk about a world economic recovery that would solve the debt problem has been replaced with nervous chatter about the future of the world economy. At the IMF meeting in Washington, U.S. Treasury Secretary Tim Geithner said, "The threat of cascading default, bank runs and catastrophic risk must be taken off the table, as otherwise, it will undermine all other efforts, both within Europe and globally."

There hasn't been so much fear, doubt and confusion in the mainstream media about the economy since the financial crash of 2008. For example, a BBC business program recently ran a weeklong series under the heading, "Has Western Capitalism Failed?".

In this context of crisis and resistance, the potential is there to rebuild the socialist left internationally. The ominous economic developments in Europe and beyond make that task an urgent one.