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欧债危机与宪政选择

April 22, 2012 Leave a comment

薛兆丰 新制度主义时代

via 欧债危机与宪政选择.

为了维持社会稳定,政府也经常推出各种暂时讨好民心的经济政策。这些政策有看得见的好处,如政绩、安抚、和谐和缓冲;但也有看不见的代价,那就是增长的税收或国债,盘根错节的既得利益网以及逐渐被侵蚀的自由。

《经济观察报》之“法律、管制与经济增长”专栏(26)

欧债危机与宪政选择

薛兆丰
2012年2月6日

欧洲多国陷入深重的债务危机,令全面运行仅仅10年的欧元体系面临挑战。有朋友慨叹道:“资本主义怎么了?市场经济失灵了,经济学恐怕要改写。”我的看法正相反:经济学恰恰得到了验证,市场规律恰恰显灵了,而西方国家有不少经济政策,恰恰是与资本主义精神背道而驰的。

据说弗里德曼(M. Friedman)曾经半开玩笑地说,经济学家只有好坏之分,而没有什么凯恩斯学派芝加哥学派、或奥地利学派之分。那究竟怎样才是好的、怎样才是坏的呢?弗里德曼认为,不相信世界上有免费午餐的,就是好经济学者。事实上,在几何曲线和数学方程重重混战的背后,经济学家之间的分歧,有时也就真是简单到“相信免费午餐与否”而已。

举一个例子。本专栏的前一期文章“宏观调控忽视微观基础”解释过,“失业”本来是劳动力搜索更高价值岗位的过程,但为了暂时掩盖事实,政府往往会采用所谓“货币政策”,通过超发货币来拔高当前的就业率;另一方面,“衰退”本来可能是生产要素配置错误而导致的结果,但为了拖延纠正错误的痛苦,政府也往往会采用所谓“财政政策”,通过增加政府支出来刺激本来不可能维持的生产和消费。

在西方民选社会,政客之所以热衷于“货币政策”和“财政政策”等调控政策,以回避或拖延真正的“岗位搜索”和“资源重配”过程,根本原因是这些政策能博取选民的欢心。当每一届政客都这么做的时候,一个国家积累的通货膨胀和财政赤字就会越来越高。天下没有免费午餐,所有这些权宜之计,都迟早要有人来承担代价。

然而,西方曾经有过大批经济学者,构建各种宏观经济模型,为“制造通货膨胀增加就业、刺激经济挽救衰退”等观念大声辩护。到上个世纪的六七十年代,这些观念达到全盛阶段,乃至当时还产生了“国家的债务究竟是不是负担(Is the national debt a burden?)”的争论。西方各国政府规模的急剧扩张,与这些观念的流行是密不可分的。

顶着舆论的风向,经济学者布坎南(J. Buchanan)和瓦格纳(R. Wagner),在1977年出版的《赤字中的民主——凯恩斯勋爵的政治遗产》(Democracy in Deficit)中指出:由于人力和资本的重新配置,会造成社会的阵痛和伤害,政客为了争取选票,倾向于选择避重就轻的经济政策。两位作者认为,政客们歪曲价格信号,回避实质变革,通过政府举债来笼络人心,从而使国家债务积重难返,形成现代社会中“民主诱发赤字”的经济规律。这一经济规律,在四十多年后的欧洲债务危机中得到了验证。

十多年前,许多经济学者不看好欧元的前景。他们的理由是:在欧元系统启动前,欧盟各国政府可以左右开弓,同时动用“货币政策”和“财政政策”来应付经济周期;但欧元启动后,“货币政策”由欧洲央行统管,欧盟各国政府的武功便被废了一半。这时,欧盟各国只能靠增加税收或增发国债度日,这便激化了财政赤字的隐患。现在,既然民主体制不能动,政客又必然要讨好选民,而国债又已是天文数字,那么对某些国家而言,除了离开欧盟并重新启动印钞机外,恐怕很难找到别的出路。

经济学揭示的是市场运行的规律。我们知道价格管制会造成资源耗散;我们知道罢工会扭曲劳动力的定价和岗位的配置,结果迫使企业家选择外包策略,从而提升了本地失业率;我们知道福利和补贴政策惩罚了生产者、鼓励了懒惰者并限制了外来的移民,从长远来说会削弱一国的可持续的生产力。古今中外,哪里长期奉行这些政策,哪里的经济就会步入困境。

要明确的是,欧美所奉行的经济体制和政策,尽管叫做“资本主义”,但已经融入了大量“干预主义”和“福利主义”的因素。所以,不管是论功行赏,还是兴师问罪,都不应该笼统地使用“资本主义”做标签,而应该具体分析,究竟是哪套制度、哪个安排、哪项政策、在哪些范围,导致了哪些后果。以我的理解,资本主义的本质是自由,但各国的民主化进程已经削弱了资本主义的自由程度。

自由和民主,不仅有区别,而且往往有冲突。简单地说,“自由”就是个人的人身、言论、劳动和产业得到法治保护,他们有权与他人缔结契约和进行贸易;而“民主”则是按多数原则,集体商议如何行使国家暴力,来干预人与人之间本来可以缔结的契约、本来可以进行的贸易以及本来可以保有的产业。

在普选制度下,政客热情兜售的经济政策,包括价格管制、贸易保护、移民劳动资格限制、以罢工为后盾的集体议价、提供廉价住房、增加贫困补贴等,均在不同程度上侵害了个人自由和市场经济。因此,一套成功的民主机制,不在于它如何能低成本地让成千上万的选民投出结果,而在于它如何能在事前严格限定投票和政府的行事范围。

中国没有实施西方标准的民主,但也面临相似的挑战。为了维持社会稳定,政府也经常推出各种暂时讨好民心的经济政策,包括价格管制、收入补贴、产业倾斜、贸易保护、户籍歧视、廉价住房等等。这些政策有看得见的好处,比如政绩、安抚、和谐和缓冲;但也有看不见的代价,那就是增长的税收或国债,盘根错节的既得利益网以及逐渐被侵蚀的自由。

欧债危机摆在那里,后果严重,根源是政客不得不讨好选民;经济规律也摆在那里,只要奉行错误的经济政策,就必定有人要为午餐付账;但眼前的制度选项并不清晰——我们只知道自由和民主并不重合,但我们仍需探索如何建立宪政(即恰如其分地限制政府的职能范围),才能让自由得到保护,让市场得到发展,并让意见得到表达。

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重拳出击新股业绩“变脸”现象

April 21, 2012 Leave a comment

曹中铭

via 重拳出击新股业绩“变脸”现象.

 

 近几年的上市公司年报,有些“故事”基本上会被重复上演。一是年报、快报或业绩预报的“打补丁”现象。据不完全统计,两市近期共发布了180份“补丁”修正公告,其中有170份来自于深市。二是上市公司利润分配的高送转大行其道。截止4月17日,已披露年报的上市公司中,“10送转10俱乐部”成员高达144家之多。三是业绩“变脸”现象再次大面积出现。

        自2009年IPO市场化改革之后,新股次新股业绩开始出现大面积“变脸”潮。新股发行制度改革后产生的“三高”发行,使场外企业对于高溢价发行趋之若鹜。毕竟,“三高”发行不仅使发行人能够以更高的价格发行新股,与此同时还能从市场中“圈”到更多的资金。但在新股鱼贯而入的背后,其质量无法得到保证的弊端也暴露无遗。

        在业绩出现“变脸”的公司中,方正证券以净利润79.42%的下降幅度“勇冠三军”,华中数控、比亚迪、天喻信息等以超过40%的幅度紧随其后,而净利润下降幅度超过30%的则高达11家之多。去年以来上市的新股中,居然有近两成的业绩出现“变脸”。毫无疑问,这样的比例并不低。

        上市公司业绩出现变脸,原因是多方面的。有的主要因为市场环境发生了变化,有的是因为原材料等价格上涨导致的,但也有的是因为上市前包装粉饰业绩,挂牌后则原形毕露。事实上,近几年A股市场频现“变脸”潮,最主要的原因是发行人为了顺利闯关存在包装粉饰行为。

        近几年上市公司业绩“变脸”现象已成年报披露期间的一道“风景”。而根据《证券发行上市保荐业务管理办法》规定,如果发行人在持续督导期间,公开发行证券上市当年营业利润比上年下滑50%以上,证监会可根据情节轻重,对相关保代实施处罚。但是,除非业绩大幅下滑无法通过“做帐”等手段来进行处理,上市公司往往会通过“精准”下降的方式来回报曾经帮助其大肆“圈钱”的保荐人与保代,比亚迪即是最好的例证。

        保荐人与保代没有履行勤勉尽责的职责,是这几年新股次新股业绩频频出现“变脸”潮的重要原因,而且也不能排除其“狼狈为奸”的可能性。而让笔者十分困惑的是,针对新股次新股频繁出现的业绩大面积“变脸”现象,监管部门竟然从来没有主动进行过调查。业绩大范围出现变脸显然是不正常的,不对其中是否存在问题进行调查与问责,同样值得商榷。

        应该说,年报、快报或业绩预报的“打补丁”现象是信息披露上的“变脸”,上市公司净利润下降属于业绩上的“变脸”。但无论哪一种“变脸”,都会对市场造成影响,严重时甚至还会对投资者造成伤害。但两种“变脸”现象却变成了A股市场的“流行色”,笔者以为监管部门应该引起足够的重视。

        笔者以为,针对新股业绩“变脸”与信披“变脸”现象,监管部门应该重拳出击。一方面严惩上市公司信息披露方面存在的不当行为,另一方面也应严惩保荐机构与保代没有履行勤勉尽责的行为。

European sovereign-debt crisis

April 20, 2012 Leave a comment

European sovereign-debt crisis

From Wikipedia, the free encyclopedia
Part of a series on:
Late-2000s financial crisis

Long-term interest rates of all eurozone countries except Estonia (secondary market yields of government bonds with maturities of close to ten years)[1] A yield of 6 % or more indicates that financial markets have serious doubts about credit-worthiness.[2]

The European sovereign debt crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area tore-finance their government debt without the assistance of third parties.

From late 2009, fears of a sovereign debt crisis developed among investors as a result of the rising government debt levels around the worldtogether with a wave of downgrading of government debt in some European states. Concerns intensified in early 2010 and thereafter,[3][4] leading Europe’s finance ministers on 9 May 2010 to approve a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF).[5] In October 2011 and February 2012, the eurozone leaders agreed on more measures designed to prevent the collapse of member economies. This included an agreement whereby banks would accept a 53.5% write-off of Greek debt owed to private creditors,[6] increasing the EFSF to about €1 trillion, and requiring European banks to achieve 9% capitalisation.[7] To restore confidence in Europe, EU leaders also agreed to create a common fiscal union including the commitment of each participating country to introduce a balanced budget amendment.[8][9]

While sovereign debt has risen substantially in only a few eurozone countries, it has become a perceived problem for the area as a whole.[10]Nevertheless, the European currency has remained stable.[11] As of mid-November 2011, the euro was even trading slightly higher against the bloc’s major trading partners than at the beginning of the crisis.[12][13] The three countries most affected, GreeceIreland and Portugal, collectively account for six percent of the eurozone’s gross domestic product (GDP).[14]

Contents

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Causes

There are many contributing factors to the ongoing European financial crisis. To find the origin of the financial distress, researchers have to conduct and analyze financial records dated many years and possibly decades old. According to Zdeneil Kudrna, a political economist, the financial crisis was destined to happen due to the way the European Union deals and make their trade policies. He argues that the European Union only takes action after the facts. They only address a situation when it has already become a problem.[15]

Public debt $ and %GDP (2010) for selected European countries

The European sovereign debt crisis has resulted from a combination of complex factors, including the globalization of finance; easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; slow economic growth in 2008 and thereafter; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bailout troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.[16][17] It is sometimes suggested that the Europeanwelfare state contributed to the disaster, but this is demonstrably false if one is to believe the most liberal Keynesian Economist.[18]

One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 2000–2007 period when the global pool of fixed income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This “Giant Pool of Money” increased as savings from high-growth developing nations entered global capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds sought alternatives globally.[19] The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country as global fixed income investors searched for yield, generating bubble after bubble across the globe. While these bubbles have burst causing asset prices (e.g., housing and commercial property) to decline, the liabilities owed to global investors remain at full price, generating questions regarding the solvency of governments and their banking systems.[17]

How each European country involved in this crisis borrowed and invested the money varies. For example, Ireland’s banks lent the money to property developers, generating a massive property bubble. When the bubble burst, Ireland’s government and taxpayers assumed private debts. In Greece, the government increased its commitments to public workers in the form of extremely generous pay and pension benefits. Iceland’s banking system grew enormously, creating debts to global investors (“external debts”) several times GDP.[17]

The interconnection in the global financial system means that if one nation defaults on its sovereign debt or enters into recession putting some of the external private debt at risk, the banking systems of creditor nations face losses. For example, in October 2011 Italian borrowers owed French banks $366 billion (net). Should Italy be unable to finance itself, the French banking system and economy could come under significant pressure, which in turn would affect France’s creditors and so on. This is referred to as financial contagion.[20][21] Another factor contributing to interconnection is the concept of debt protection. Institutions entered into contracts called credit default swaps (CDS) that result in payment should default occur on a particular debt instrument (including government issued bonds). But, since multiple CDS’s can be purchased on the same security, it is unclear what exposure each country’s banking system now has to CDS.[22]

Some politicians, notably Angela Merkel, have sought to attribute some of the blame for the crisis to hedge funds and other speculators stating that “institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere”.[23][24][25][26][27] Although some financial institutions clearly profited from the growing Greek government debt in the short run,[28] there was a long lead up to the crisis.

Rising government debt levels

Government debt of Eurozone, Germany and crisis countries compared to Eurozone GDP

Government deficit of Eurozone compared to USA and UK

In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels.

However, a number of EU member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures.[29][30] The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services.

Public debt as a percent of GDP (2010)

A number of “appalled economists” have condemned the popular notion in the media that rising debt levels of European countries were caused by excess government spending. According to their analysis, increased debt levels are due to the large bailout packages provided to the financial sector during the late-2000s financial crisis, and the global economic slowdown thereafter. The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to 7% during the financial crisis. In the same period the average government debt rose from 66% to 84% of GDP. The authors also stressed that fiscal deficits in the euro area were stable or even shrinking since the early 1990s.[31] US economist Paul Krugman named Greece as the only country where fiscal irresponsibility is at the heart of the crisis.[32]

Either way, high debt levels alone may not explain the crisis. According to The Economist Intelligence Unit, the position of the euro area looked “no worse and in some respects, rather better than that of the US or the UK.” The budget deficit for the euro area as a whole (see graph) is much lower and the euro area’s government debt/GDP ratio of 86% in 2010 was about the same level as that of the US. Moreover, private-sector indebtedness across the euro area is markedly lower than in the highly leveragedAnglo-Saxon economies.[33]

Trade imbalances

Current account balances relative to GDP (2010)

Commentators such as Financial Times journalist Martin Wolf have asserted that the root of the crisis was growing trade imbalances. He notes in the run-up to the crisis, from 1999 to 2007, Germany had a considerably better public debt and fiscal deficit relative to GDP than the most affected eurozone members. In the same period, these countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions.[34] Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all worsened.

More recently, Greece’s trading position has improved;[35] in the period November 2010 to October 2011 imports dropped 12% while exports grew 15% (40% to non-EU countries in comparison to October 2010).[35]

Monetary policy inflexibility

Since membership of the eurozone establishes a single monetary policy, individual member states can no longer act independently print money in order to pay creditors and ease their risk of default. By “printing money” a country’s currency is devalued relative to its (eurozone) trading partners, making its exports cheaper, in principle leading to an improved balance of trade, increased GDP and higher tax revenues innominal terms.[36] In the reverse direction moreover, assets held in a currency which has devalued suffer losses on the part of those holding them. For example by the end of 2011, following a 25 percent fall in the rate of exchange and 5 percent rise in inflation, eurozone investors inPound Sterling, locked in to euro exchanges rates, had suffered an approximate 30 percent cut in the repayment value of this debt.[37]

Loss of confidence

Sovereign CDS prices of selected European countries (2010–2011). The left axis is in basis points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years.

Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the eurozone was safe. Banks had substantial holdings of bonds from weaker economies such as Greece which offered a small premium and seemingly were equally sound.

As the crisis developed it became obvious that Greek, and possibly other countries’, bonds offered substantially more risk. Contributing to lack of information about the risk of European sovereign debt was conflict of interest by banks that were earning substantial sums underwriting the bonds.[38]The loss of confidence is marked by rising sovereign CDS prices, indicating market expectations about countries’ creditworthiness (see graph).

Furthermore, investors have doubts about the possibilities of policy makers to quickly contain the crisis. Since countries that use the euro as their currency have fewer monetary policy choices (e.g., they cannot print money in their own currencies to pay debt holders), certain solutions require multi-national cooperation. Further, the European Central Bank has an inflation control mandate but not an employment mandate, as opposed to theU.S. Federal Reserve, which has a dual mandate. According to the Economist, the crisis “is as much political as economic” and the result of the fact that the euro area is not supported by the institutional paraphernalia (and mutual bonds of solidarity) of a state.[33]

Rating agency views

On December 5, 2011 S&P placed its long-term sovereign ratings on 15 members of the eurozone on “CreditWatch” with negative implications; S&P wrote this was due to “systemic stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone; 2) Markedly higher risk premiums on a growing number of eurozone sovereigns including some that are currently rated ‘AAA’; 3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members; 4) High levels of government and household indebtedness across a large area of the eurozone; and 5) The rising risk of economic recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a whole.”[39]

Evolution of the crisis

In the first few weeks of 2010, there was renewed anxiety about excessive national debt. Frightened investors demanded ever higher interest rates from several governments with higher debt levels, deficits and current account deficits. This in turn made it difficult for some governments to finance further budget deficits and service existing debt, particularly when economic growth rates were low, and when a high percentage of debt was in the hands of foreign creditors, as in the case of Greece and Portugal.[40]Elected officials have focused on austerity measures (e.g., higher taxes and lower expenses) contributing to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. Especially in countries where government budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on CDS between these countries and other EU member states, most importantly Germany.[41][42] By the end of 2011, Germany was estimated to have made more than €9 billion out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (bunds).[43]While Switzerland equally benefited from lower interest rates, the crisis also harmed its export sector due to a substantial influx of foreign capital and the resulting rise of the Swiss franc. In September 2011 the Swiss National Bank surprised currency traders by pledging that “it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs”, effectively weakening the Swiss franc. This is the biggest Swiss intervention since 1978.[44]

Greece

Greece’s debt percentage since 1999 compared to the average of the eurozone

In the early mid 2000s, Greece’s economy was one of the fastest growing in the eurozone and the government took advantage of it by running a large structural deficit,[45] partly due to high defense spending amid historic enmity to Turkey. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries — shipping and tourism — were especially sensitive to changes in the business cycle. As a result, the country’s debt began to increase rapidly.

100,000 people protest against the harsh austerity measures in front of parliament building in Athens (29 May 2011)

On 23 April 2010, the Greek government requested an initial loan of €45 billion from the EU andInternational Monetary Fund (IMF), to cover its financial needs for the remaining part of 2010.[46][47] A few days later Standard & Poor’s slashed Greece’s sovereign debt rating to BB+ or “junk” status amid fears of default,[48] in which case investors were liable to lose 30–50% of their money.[48] Stock markets worldwide and the Euro currency declined in response to this announcement.[49] On 1 May 2010, the Greek government announced a series of austerity measures[50] to secure a three year€110 billion loan.[51] This was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece.[52] The Troika (EU, ECB and IMF), offered Greece a second bailout loan worth €130 billion in October 2011, but with the activation being conditional on implementation of further austerity measures and a debt restructure agreement. A bit surprisingly, the Greek prime minister George Papandreou first answered that call, by announcing a December 2011 referendum on the new bailout plan,[53][54] but had to back down amidst strong pressure from EU partners, who threatened to withhold an overdue €6 billion loan payment that Greece needed by mid-December.[53][55] On 10 November 2011 Papandreou instead opted to resign, following an agreement with the New Democracy party and the Popular Orthodox Rally, to appoint non-MP technocrat Lucas Papademos as new prime minister of an interim national union government, with responsibility for implementing the needed austerity measures to pave the way for the second bailout loan.[56][57]

All the implemented austerity measures, have so far helped Greece bring down its primary deficit before interest payments, from €24.7bn (10.6% of GDP) in 2009 to just €5.2bn (2.4% of GDP) in 2011[58][59], but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.[60] Overall the Greek GDP had its worst decline in 2011 with -6.9%,[61] a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005,[62][63] and with 111,000 Greek companies going bankrupt (27% higher than in 2010).[64][65] As a result, the seasonal adjusted unemployment rate also grew from 7.5% in September 2008 to a record high of 19.9% in November 2011, while the Youth unemployment rate during the same time rose from 22.0% to as high as 48.1%.[66][67] Overall the share of the population living at “risk of poverty or social exclusion” did not increase noteworthy during the first 2 year of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (only being slightly worse than the EU27-average at 23.4%),[68] but for 2011 the figure was now estimated to have risen sharply above 33%.[69] In February 2012, an IMF official negotiating Greek austerity measures admitted that excessive spending cuts were harming Greece.[58]

Some economic experts argue that the best option for Greece and the rest of the EU, would be to engineer an “orderly default”, allowing Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate.[70][71] However, if Greece were to leave the euro, the economic and political impact would be devastating. According to Japanese financial company Nomura an exit would lead to a 60 percent devaluation of the new drachma. UBS warned of “hyperinflationmilitary coups and possible civil warthat could afflict a departing country”.[72][73]

To prevent this from happening, the troika (EU, IMF and ECB) eventually agreed in February 2012 to provide a second bailout package worth €130 billion,[74] conditional on the implementation of another harsh austerity package (reducing the Greek spendings with €3.3bn in 2012 and another €10bn in 2013 and 2014).[59] For the first time, the bailout deal also included a debt restructure agreement with the private holders of Greek government bonds (banks, insurers and investment funds), to “voluntarily” accept a bond swap with a 53.5% nominal write-off, partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and the maturity prolonged to 11-30 years (independently of the previous maturity).[6] It is the world’s biggest debt restructuring deal ever done, affecting some €206 billion of Greek government bonds.[75] The debt write-off had a seize of €107 billion, and caused the Greek debt level to fall from roughly €350bn to €240bn in March 2012, with the predicted debt burden now showing a more sustainable size equal to 117% of GDP,[76]somewhat lower than the originally expected 120.5%.[77][78] Altogether Greece received aid worth €380bn or €33.600 per capita. This equals 177% of Greece’s GDP, much larger than the funds Western Europe received through the Marshall Plan after the Second World War, which amounted to 2.1% of GDP.[59]

On 9 March 2012 the International Swaps and Derivatives Association (ISDA) issued a communique calling the PSI/debt restructuring deal a “Restructuring Credit Event” which will cause credit default swaps. According to Forbes magazine Greece’s restructuring represents a default.[79] [80]

This credit event implies that previous Greek bond holders are being given, for 1000€ of previous notional, 150€ in “PSI payment notes” issued by the EFSF and 315€ in “New Greek Bonds” issued by the Hellenic Republic, including a “GDP-linked security”. The latter represents a marginal coupon enhancement in case the Greek growth meets certain conditions. While the market price of the portfolio proposed in the exchange is of the order of 21% of the original face value (15% for the two EFSF PSI notes – 1 and 2 years – and 6% for the New Greek Bonds – 11 to 30 years), the duration of the set of New Greek Bonds is slightly below 10 years.[81]

Ireland

Irish government deficit compared to other European countries and the United States (2000–2013)

The Irish sovereign debt crisis was not based on government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. On 29 September 2008, Finance Minister Brian Lenihan, Jnr issued a one-year guarantee to the banks’ depositors and bond-holders. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency(NAMA), a body designed to remove bad loans from the six banks.

Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the federal budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite draconian austerity measures.[17][82] Ireland could have guaranteed bank deposits and let private bondholders who had invested in the banks face losses, but instead borrowed money from the ECB to pay these bondholders, shifting the losses and debt to its taxpayers, with severe negative impact on Ireland’s creditworthiness. As a result, the government started negotiations with the EU, the IMF and three nations: the United Kingdom, Denmark and Sweden, resulting in a €67.5 billion “bailout” agreement of 29 November 2010[83][84] Together with additional €17.5 billioncoming from Ireland’s own reserves and pensions, the government received €85 billion,[85] of which €34 billion were used to support the country’s ailing financial sector.[86] In return the government agreed to reduce its budget deficit to below three percent by 2015.[86] In April 2011, despite all the measures taken, Moody’s downgraded the banks’ debt to junk status.[87] In July 2011 European leaders agreed to cut the interest rate that Ireland was paying on its EU/IMF bailout loan from around 6% to between 3.5% and 4% and to double the loan time to 15 years. The move was expected to save the country between 600–700 million euros per year.[88] On 14 September 2011, in a move to further ease Ireland’s difficult financial situation, the European Commission announced it would cut the interest rate on its €22.5 billion loan coming from the European Financial Stability Mechanism, down to 2.59 per cent – which is the interest rate the EU itself pays to borrow from financial markets.[89]

The Euro Plus Monitor report from November 2011 attests to Ireland’s vast progress in dealing with its financial crisis, expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards.[90] According to the Centre for Economics and Business Research Ireland’s export-led recovery “will gradually pull its economy out of its trough”. As a result of the improved economic outlook, the cost of 10-year government bonds, which has already fallen substantially since mid July 2011 (see the graph “Long-term Interest Rates”), is expected to fall further to 4 per cent by 2015.[91]

Portugal

A report released in January 2011 by the Diário de Notícias[92] and published in Portugal by Gradiva, demonstrated that in the period between the Carnation Revolution in 1974 and 2010, the democratic Portuguese Republic governments have encouraged over-expenditure and investment bubbles through unclear public-private partnerships and funding of numerous ineffective and unnecessary external consultancy and advisory of committees and firms. This allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky creditpublic debt creation, and Europeanstructural and cohesion funds were mismanaged across almost four decades. Prime Minister Sócrates‘s cabinet was not able to forecast or prevent this in 2005, and later it was incapable of doing anything to improve the situation when the country was on the verge of bankruptcy by 2011.[93]

Robert Fishman, in the New York Times article “Portugal’s Unnecessary Bailout”, points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators.[94] In the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal’s industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe.[94]

On 16 May 2011, the eurozone leaders officially approved a €78 billion bailout package for Portugal, which became the third eurozone country, after Ireland and Greece, to receive emergency funds. The bailout loan was equally split between the European Financial Stabilisation Mechanism, the European Financial Stability Facility, and the International Monetary Fund.[95] According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1 percent.[96] As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013.[97] The Portuguese government also agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization.[98][99] In 2012, all public servants had already seen an average wage cut of 20% relative to their 2010 baseline, with cuts reaching 25% for those earning more than 1,500 euro[quantify]. This led to a flood of specialized technicians and top officials leaving the public service, many looking for better positions in the private sector or in other European countries.[citation needed]

On 6 July 2011, the ratings agency Moody’s had cut Portugal’s credit rating to junk status, Moody’s also launched speculation that Portugal could follow Greece in requesting a second bailout.[100]

In December 2011, it was reported that Portugal’s estimated budget deficit of 4.5 percent in 2011 would be substantially lower than expected, due to a one-off transfer of pension funds. The country would therefore meet its 2012 target a year earlier than expected.[97] Despite the fact that the economy is expected to contract by 3 percent in 2011 the IMF expects the country to be able to return to medium and long-term debt sovereign markets by late 2013.[101]

Cyprus

In September 2011, yields on Cyprus long-term bonds have risen above 12%, since the small island of 840,000 people was downgraded by all major credit ratings agencies following a devastating explosion at a power plant in July and slow progress with fiscal and structural reforms. Since January 2012, Cyprus is relying on a € 2.5bn emergency loan from Russia to cover its budget deficit and re-finance maturing debt. The loan has an interest rate of 4.5% and it is valid for 4.5 years[102] though it is expected that Cyprus will be able to fund itself again by the first quarter of 2013.[103]

On 13 March 2012 Moody’s has slashed Cyprus’s credit rating into Junk status, warning that the Cyprus government will have to inject fresh capital into its banks to cover losses incurred through Greece’s debt swap. Cyprus’s banks were highly exposed to Greek debt and so are disproportionately hit by the haircut taken by creditors.[104]

Possible spread to other countries

Total financing needs of selected countries in % of GDP (2011–2013)

Economic data from Portugal, Italy, Ireland, Greece, United Kingdom, Spain, Germany, the EU and the eurozone for 2009

The 2010 annual budget deficit and public debt, both relative to GDP for selected European countries

Long-term interest rates of selected European countries.[1] Note that weak non-eurozone countries (Hungary, Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries.

One of the central concerns prior to the bailout was that the crisis could spread to several other countries after reducing confidence in other European economies. According to the UK Financial Policy Committee “Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems.”[105] Besides Ireland, with a government deficit in 2010 of 32.4% of GDP, and Portugal at 9.1%, other countries such as Spain with 9.2% are also at risk.[106]

For 2010, the OECD forecast $16 trillion would be raised in government bonds among its 30 member countries. Financing needs for the eurozone come to a total of €1.6 trillion, while the U.S. is expected to issue US$1.7 trillion more Treasury securities in this period,[107] and Japan has¥213 trillion of government bonds to roll over.[108] Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels but even countries such as the U.S., Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy.[109]

Italy

Italy’s deficit of 4.6 percent of GDP in 2010 was similar to Germany’s at 4.3 percent and less than that of the U.K. and France. Italy even has a surplus in its primary budget, which excludes debt interest payments. However, its debt has increased to almost 120 percent of GDP (U.S. $2.4 trillion in 2010) and economic growth was lower than the EU average for over a decade.[110] This has led investors to view Italian bonds more and more as a risky asset.[111] On the other hand, the public debt of Italy has a longer maturity and a substantial share of it is held domestically. Overall this makes the country more resilient to financial shocks, ranking better than France and Belgium.[112] About 300 billion euros of Italy’s 1.9 trillion euro debt matures in 2012. It will therefore have to go to the capital markets for significant refinancing in the near-term.[113]

On 15 July and 14 September 2011, Italy’s government passed austerity measures meant to save €124 billion.[114][115] Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent for 10-year bonds, climbing above the 7 percent level where the country is thought to lose access to financial markets.[116] On 11 November 2011, Italian 10-year borrowing costs fell sharply from 7.5 to 6.7 percent after Italian legislature approved further austerity measures and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.[117] The measures include a pledge to raise €15 billion from real-estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and a gradual reduction in government ownership of local services.[111] The interim government expected to put the new laws into practice is led by former European Union Competition Commissioner Mario Monti.[111]

As in other countries, the social effects have been severe, with child labour even re-emerging in poorer areas.[118]

Spain

Spain has a comparatively low debt among advanced economies.[119] The country’s public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece.[120][121] Like Italy, Spain has most of its debt controlled internally, and both countries are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.[122] As one of the largest eurozone economies the condition of Spain’s economy is of particular concern to international observers, and has faced pressure from the United States, the IMF, other European countries and the European Commission to cut its deficit more aggressively.[123][124] Spain’s public debt was approximately U.S. $820 billion in 2010, roughly the level of Greece, Portugal, and Ireland combined.[125]

Rumors raised by speculators about a Spanish bail-out were dismissed by then Spanish Prime Minister José Luis Rodríguez Zapatero as “complete insanity” and “intolerable”.[126] Nevertheless, shortly after the announcement of the EU’s new “emergency fund” for eurozone countries in early May 2010, Spain had to announce new austerity measures designed to further reduce the country’s budget deficit, in order to signal financial markets that it was safe to invest in the country.[127] The Spanish government had hoped to avoid such deep cuts, but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January.

Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010[128] and 8.5% in 2011.[129] Due to the European crisis and over spending by regional governments the latest figure is higher than the original target of 6%.[130][131] To build up additional trust in the financial markets, the government amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020. The amendment states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies.[132][133] Under pressure from the EU the new conservative Spanish government led by Mariano Rajoyaims to cut the deficit further to 5.3 percent in 2012 and 3 percent in 2013.[134]

Belgium

In 2010, Belgium’s public debt was 100% of its GDP—the third highest in the eurozone after Greece and Italy[135] and there were doubts about the financial stability of the banks,[136] following the country’s major financial crisis in 2008–2009. After inconclusive elections in June 2010, by November 2011[137] the country still had only a caretaker government as parties from the two main language groups in the country (Flemish and Walloon) were unable to reach agreement on how to form a majority government.[135] In November 2010 financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium’s borrowing costs rose.[136]

However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3.7% were still below those of Ireland (9.2%), Portugal (7%) and Spain (5.2%).[136] Furthermore, thanks to Belgium’s high personal savings rate, the Belgian Government financed the deficit from mainly domestic savings, making it less prone to fluctuations of international credit markets.[138] Nevertheless on 25 November 2011, Belgium’s long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor[139] and 10-year bond yields reached 5.66%.[137] Shortly after, Belgian negotiating parties reached an agreement to form a new government. The deal includes spending cuts and tax rises worth about €11 billion, which should bring the budget deficit down to 2.8% of GDP by 2012, and to balance the books in 2015.[140] Following the announcement Belgium 10-year bond yields fell sharply to 4.6%.[141]

France

France’s public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a 2010 budget deficit of 7% GDP.[142] By 16 November 2011, France’s bond yield spreads vs. Germany had widened 450% since July, 2011.[143] France’s C.D.S. contract value rose 300% in the same period.[144] On 1 December 2011, France’s bond yield had retreated and the country successfully auctioned €4.3 billion worth of 10 year bonds at an average yield of 3.18%, well below the perceived critical level of 7%.[145] By early February 2012, yields on French 10 year bonds had fallen to 2.84%.[146]

United Kingdom

According to the Financial Policy Committee “Any associated disruption to bank funding markets could spill over to UK banks.”[105] Bank of England governor Mervyn King declared that the UK is very much at risk from a domino-fall of defaults and called on banks to build up more capital when financial conditions allowed. This is because the UK has the highest gross foreign debt of any European country (€7.3 trillion; €117,580 per person) due in large part to its highly leveraged financial industry, which is closely connected with both the United States and the eurozone.[147]

Solutions

EU emergency measures

European Financial Stability Facility (EFSF)

On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument[148] aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalize banks or buy sovereign debt.[149] Emissions of bonds are backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank. The €440 billion lending capacity of the facility is jointly and severally guaranteed by the eurozone countries’ governments and may be combined with loans up to €60 billion from the European Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to €250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion. [150]

The EFSF issued €5 billion of five-year bonds in its inaugural benchmark issue January 25 2011, attracting an order book of €44.5 billion. This amount is a record for any sovereign bond in Europe, and €24.5 billion more than the European Financial Stabilisation Mechanism (EFSM), a separate European Union funding vehicle, with a €5 billion issue in the first week of January 2011.[151]

On 29 November 2011, the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments, and to create investment vehicles that would boost the EFSF’s firepower to intervene in primary and secondary bond markets.[152]

Reception by financial markets

Stocks surged worldwide after the EU announced the EFSF’s creation. The facility eased fears that the Greek debt crisis would spread,[153] and this led to some stocks rising to the highest level in a year or more.[154] The euro made its biggest gain in 18 months,[155] before falling to a new four-year low a week later.[156] Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency.[157] Commodity prices also rose following the announcement.[158] The dollar Libor held at a nine-month high.[159] Default swaps also fell.[160] The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.[161] The agreement is interpreted as allowing the ECB to start buying government debt from the secondary market which is expected to reduce bond yields.[162] As a result Greek bond yields fell sharply from over 10% to just over 5%.[163] Asian bonds yields also fell with the EU bailout.[164])

Usage of EFSF funds

Debt profile of Eurozone countries

The EFSF only raises funds after an aid request is made by a country.[165] As of the end of December 2011, it has been activated two times. In November 2010, it financed €17.7 billion of the total €67.5 billion rescue package for Ireland (the rest was loaned from individual European countries, the European Commission and the IMF). In May 2011 it contributed one third of the €78 billion package for Portugal. As part of the second bailout for Greece, the loan was shifted to the EFSF, amounting to €164 billion (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014.[166] This leaves the EFSF with €250 billion or an equivalent of €750 billion in leveraged firepower.[167] According to German newspaper Sueddeutsche, this is more than enough to finance the debt rollovers of all flagging European countries until end of 2012, in case necessary.[167]

The EFSF is set to expire in 2013, running one year parallel to the permanent €500 billion rescue funding program called the European Stability Mechanism (ESM), which will start operating as soon as member states representing 90% of the capital commitments have ratified it. This is expected to be in July 2012.[168][169]

On 13 January 2012, Standard & Poor’s downgraded France and Austria from AAA rating, lowered Spain, Italy (and five other[170]) euro members further, and maintained the top credit rating for Finland, Germany, Luxembourg, and the Netherlands; shortly after, S&P also downgraded the EFSF from AAA to AA+.[170][171]

European Financial Stabilisation Mechanism (EFSM)

On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism (EFSM), an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral.[172] It runs under the supervision of the Commission[173] and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty.[174] The Commission fund, backed by all 27 European Unionmembers, has the authority to raise up to €60 billion[175] and is rated AAA by FitchMoody’s and Standard & Poor’s.[176][177]

Under the EFSM, the EU successfully placed in the capital markets a €5 billion issue of bonds as part of the financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%.[178]

Like the EFSF, the EFSM will also be replaced by the permanent rescue funding programme ESM, which is due to be launched in July 2012.[168]

Brussels agreement and aftermath

On 26 October 2011, leaders of the 17 eurozone countries met in Brussels and agreed on a 50% write-off of Greek sovereign debt held by banks, a fourfold increase (to about €1 trillion) in bail-out funds held under the European Financial Stability Facility, an increased mandatory level of 9% for bank capitalisation within the EU and a set of commitments from Italy to take measures to reduce its national debt. Also pledged was €35 billion in “credit enhancement” to mitigate losses likely to be suffered by European banks. José Manuel Barroso characterised the package as a set of “exceptional measures for exceptional times”.[7][179]

The package’s acceptance was put into doubt on 31 October when Greek Prime Minister George Papandreou announced that a referendum would be held so that the Greek people would have the final say on the bailout, upsetting financial markets.[180] On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou.

In late 2011, Landon Thomas in the New York Times noted that some, at least, European banks were maintaining high dividend payout rates and none were getting capital injections from their governments even while being required to improve capital ratios. Thomas quoted Richard Koo, an economist based in Japan, an expert on that country’s banking crisis, and specialist in balance sheet recessions, as saying:

I do not think Europeans understand the implications of a systemic banking crisis…. When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession — if not depression…. Government intervention should be the first resort, not the last resort.

Beyond equity issuance and debt-to-equity conversion, then, one analyst “said that as banks find it more difficult to raise funds, they will move faster to cut down on loans and unload lagging assets” as they work to improve capital ratios. This latter contraction of balance sheets “could lead to a depression”, the analyst said.[181] Reduced lending was a circumstance already at the time being seen in a “deepen[ing] crisis” in commodities trade finance in western Europe.[182]

Final agreement on the second bailout package

In a marathon meeting on 20/21 February 2012 the Eurogroup agreed with the IMF and the Institute of International Finance on the final conditions of the second bailout package worth €130 billion. The lenders agreed to increase the nominal haircut from 50% to 53.5%. EU Member States agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility to a level of just 150 basis points above the Euribor. Furthermore, governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income until 2020. Altogether this should bring down Greece’s debt to between 117%[183] and 120.5% of GDP by 2020.[77]

ECB interventions

ECB Securities Markets Program (SMP) covering bond purchases from May 2010 till April 2012

The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity.[184]

In May 2010 it took the following actions:

  • It began open market operations buying government and private debt securities,[185] reaching €219.5 billion by February of 2012,[186] though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation.[187] According to Rabobankeconomist Elwin de Groot, there is a “natural limit” of €300 billion the ECB can sterilize.[188]
  • It reactivated the dollar swap lines[189] with Federal Reserve support.[190]
  • It changed its policy regarding the necessary credit rating for loan deposits, accepting as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation’s credit rating.

The move took some pressure off Greek government bonds, which had just been downgraded to junk status, making it difficult for the government to raise money on capital markets.[191]

On 30 November 2011, the European Central Bank, the U.S. Federal Reserve, the central banks of Canada, Japan, Britain and theSwiss National Bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the real economy. The central banks agreed to lower the cost of dollar currency swaps by 50 basis points to come into effect on 5 December 2011. They also agreed to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies.[192]

Long Term Refinancing Operation (LTRO)

The ECB conducts repo auctions as weekly main refinancing operations (MRO with a (bi)weekly maturity and monthly Long Term Refinancing Operations (LTROs) maturing after three months. In 2003, refinancing via LTROs amounted to 45 bln Euro which is about 20% of overall liquidity provided by the ECB. [193]

The ECB’s first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008.[194] Previously the longest tender offered was three months. It announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTROs). The first tender was settled April 3, and was more than four times oversubscribed. The €25 billion auction drew bids amounting to €103.1 billion, from 177 banks. Another six-month tender was allotted on July 9, again to the amount of €25 billion.[195]

The first 1y LTRO in June 2009 had close to 1100 bidders. [196] On 22 December 2011, the ECB [197] started the biggest infusion of credit into the European banking system in the euro’s 13 year history. Under its LTRO it loaned €489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent.[198] The by far biggest amount of€325 billion was tapped by banks in Greece, Ireland, Italy and Spain.[199] This way the ECB tried to make sure that banks have enough cash to pay off €200 billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis.[200] On 29 February 2012, the ECB held a second auction, LTRO2, providing 800 Eurozone banks with further €529.5 billion in cheap loans. [201] Net new borrowing under the €529.5 billion February auction was around €313 billion; out of a total of €256 billion existing ECB lending (MRO + 3m&6m LTROs), €215 billion was rolled into LTRO2. [202]

Resignations

In September 2011, Jürgen Stark became the second German after Axel A. Weber to resign from the ECB Governing Council in 2011. Weber, the former Deutsche Bundesbankpresident, was once thought to be a likely successor to Jean-Claude Trichet as bank president. He and Stark were both thought to have resigned due to “unhappiness with the ECB’s bond purchases, which critics say erode the bank’s independence”. Stark was “probably the most hawkish” member of the council when he resigned. Weber was replaced by his Bundesbank successor Jens Weidmann, while Belgium’s Peter Praet took Stark’s original position, heading the ECB’s economics department.[203]

Economic reforms and recovery

Increase competitiveness

See also: Euro Plus Pact

Change in unit labour costs (2000-2010)

Eurozone economic health and adjustment progress 2011 (Source: Euro Plus Monitor)[204]

Slow GDP growth rates correspond to slower growth in tax revenues and higher safety net spending, increasing deficits and debt levels. Fareed Zakaria described the factors slowing growth in the eurozone, writing in November 2011: “Europe’s core problem [is] a lack of growth… Italy’s economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade… The fact is that Western economies – with high wages, generous middle-class subsidies and complex regulations and taxes – have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world).” He advocated lower wages and steps to bring in more foreign capital investment.[205] British economic historian Robert Skidelsky disagreed saying it was excessive lending by banks, not deficit spending that created this crisis. Government’s mounting debts are a response to the economic downturn as spending rises and tax revenues fall, not its cause.[206]

To improve the situation, crisis countries must significantly increase their international competitiveness. Typically this is done by depreciating the currency, as in the case of Iceland, which suffered the largest financial crisis in 2008-2011 in economic history but has since vastly improved its position. Since eurozone countries cannot devalue their currency, policy makers try to restore competitiveness through internal devaluation, a painful economic adjustment process, where a country aims to reduce its unit labour costs.[207] German economist Hans-Werner Sinn noted in 2012 that Ireland was the only country that had implemented relative wage moderation in the last five year, which helped decrease its relative price/wage levels by 16%. Greece would need to bring this figure down by 31%, effectively reaching the level of Turkey.[208][209]

Other economists argue that no matter how much Greece and Portugal drive down their wages, they could never compete with low-cost developing countries such as China or India. Instead weak European countries must shift their economies to higher quality products and services, though this is a long-term process and may not bring immediate relief.[210]

Progress

On 15 November 2011, the Lisbon Council published the Euro Plus Monitor 2011. According to the report most critical eurozone member countries are in the process of rapid reforms. The authors note that “Many of those countries most in need to adjust […] are now making the greatest progress towards restoring their fiscal balance and external competitiveness”. Greece, Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report (see graph).[204]

Increase investment

There has been substantial criticism over the austerity measures implemented by most European nations to counter this debt crisis. Some argue that an abrupt return to “non-Keynesian” financial policies is not a viable solution[211] and predict that deflationary policies now being imposed on countries such as Greece and Spain might prolong and deepen their recessions.[212] In a 2003 study that analyzed 133 IMF austerity programmes, the IMF’s independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth.[213][214] In early 2012 an IMF official, who negotiated Greek austerity measures, admitted that spending cuts were harming Greece.[58][58] Nouriel Roubini adds that the new credit available to the heavily indebted countries did not equate to an immediate revival of economic fortunes: “While money is available now on the table, all this money is conditional on all these countries doing fiscal adjustment and structural reform.”[215]

According to Keynesian economists “growth-friendly austerity” relies on the false argument that public cuts would be compensated for by more spending from consumers and businesses, a theoretical claim that has not materialized. The case of Greece shows that excessive levels of private indebtedness and a collapse of public confidence (over 90% of Greeks fear unemployment, poverty and the closure of businesses)[216] led the private sector to decrease spending in an attempt to save up for rainy days ahead. This led to even lower demand for both products and labor, which further deepened the recession and made it ever more difficult to generate tax revenues and fight public indebtedness.[217]

Instead of austerity, Keynes suggested increasing investment and cutting income tax for low earners to kick-start the economy and boost growth and employment.[218] Since struggling European countries lack the funds to engage in deficit spending, German economist and member of the German Council of Economic Experts Peter Bofinger and Sony Kapoor of the global think tank Re-Define suggest financing additional public investments by growth-friendly taxes on “property, land, wealth, carbon emissions and the under-taxed financial sector”. They also called on EU countries to renegotiate the EU savings tax directive and to sign an agreement to help each other crack down on tax evasion and avoidance. Currently authorities capture less than 1% in annual tax revenue on untaxed wealth transferred to other EU members. Furthermore the two suggest providing €40 billion in additional funds to the European Investment Bank, which could then lend ten times that amount to the employment-intensive smaller business sector.[217]

Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution,[219] union leaders have also argued that the working population is being unjustly held responsible for the economic mismanagement errors of economists, investors, and bankers. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 2007–2010, and this has led many to call for additional regulation of the banking sector across not only Europe, but the entire world.[220]

Proposed long-term solutions

European fiscal union and revision of the Lisbon Treaty

Main article: European Fiscal Union

In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules.[221][222] By the end of the year, Germany, France and some other smaller EU countries went a step further and vowed to create a fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties.[8][9] On 9 December 2011 at the European Council meeting, all 17 members of the eurozone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing, with penalties for those countries who violate the limits.[223] All other non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote.[168]

Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister David Cameron, who demanded that the City of London be excluded from future financial regulations, including the proposed EU financial transaction tax.[224][225] By the end of the day, 26 countries had agreed to the plan, leaving the United Kingdom as the only country not willing to join.[226] Cameron subsequently conceded that his action had failed to secure any safeguards for the UK.[227] Britain’s refusal to be part of the Franco-German fiscal compact to safeguard the eurozone constituted a de facto refusal (PM David Cameron vetoed the project) to engage in any radical revision of the Lisbon Treaty at the expense of British sovereignty: centrist analysts such as John Rentoul of The Independent (a generally Europhile newspaper) concluded that “Any Prime Minister would have done as Cameron did”.[228]

Eurobonds

Main article: Eurobonds

A growing number of investors and economists say Eurobonds would be the best way of solving a debt crisis,[229] though their introduction matched by tight financial and budgetary coordination may well require changes in EU treaties.[229] On 21 November 2011, the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term “stability bonds”, Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public finances.[230][231]

Germany remains largely opposed at least in the short term to a collective takeover of the debt of states that have run excessive budget deficits and borrowed excessively over the past years, saying this could substantially raise the country’s liabilities.[232]

European Stability Mechanism (ESM)

The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism in July 2012.[168]

On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to allow for a permanent bail-out mechanism to be established[233] including stronger sanctions. In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the European Commission, rather than EU states, would play ‘a central role’ in running the ESM.[234][235] According to this treaty, the ESM will be an intergovernmental organisation under public international law and will be located inLuxembourg.[236][237]

Such a mechanism serves as a “financial firewall.” Instead of a default by one country rippling through the entire interconnected financial system, the firewall mechanism can ensure that downstream nations and banking systems are protected by guaranteeing some or all of their obligations. Then the single default can be managed while limiting financial contagion.

Address current account imbalances

Current account imbalances (1997-2013)

Regardless of the corrective measures chosen to solve the current predicament, as long as cross border capital flows remain unregulated in the euro area,[238] current account imbalances are likely to continue. A country that runs a large current account or trade deficit (i.e., importing more than it exports) must ultimately be a net importer of capital; this is a mathematical identity called the balance of payments. In other words, a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those imports. Conversely, Germany’s large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital, lending money to other countries to allow them to buy German goods.[239]

The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96 billion, $75.31bn and $35.97bn, and $25.6bn respectively, while Germany’s trade surplus was $188.6bn.[240] A similar imbalance exists in the U.S., which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. Ben Bernanke warned of the risks of such imbalances in 2005, arguing that a “savings glut” in one country with a trade surplus can drive capital into other countries with trade deficits, artificially lowering interest rates and creating asset bubbles.[241][242][243]

A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies, which would reduce the imbalance as the relative price of its exports increases. This currency appreciation occurs as the importing country sells its currency to buy the exporting country’s currency used to purchase the goods. Alternatively, trade imbalances can be reduced if a country encouraged domestic saving by restricting or penalizing the flow of capital across borders, or by raising interest rates, although this benefit is likely offset by slowing down the economy and increasing government interest payments.[244]

Either way, many of the countries involved in the crisis are on the euro, so devaluation, individual interest rates and capital controls are not available. The only solution left to raise a country’s level of saving is to reduce budget deficits and to change consumption and savings habits. For example, if a country’s citizens saved more instead of consuming imports, this would reduce its trade deficit.[244] It has therefore been suggested that countries with large trade deficits (e.g. Greece) consume less and improve their exporting industries. On the other hand, export driven countries with a large trade surplus, such as Germany, Austria and the Netherlands would need to shift their economies more towards domestic services and increase wages to support domestic consumption.[34][245]

European Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests transforming the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. Given the backing of all the eurozone countries and the ECB “the EMU would achieve a similarly strong position vis-a-vis financial investors as the US where the Fed backs government bonds to an unlimited extent.” To ensure fiscal discipline despite the lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet fiscal and macroeconomic criteria. Governments lacking sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates.[246]

The econometric analysis suggests that “If the short-term and long- term interest rates in the euro area were stabilized at 1.5 % and 3 %, respectively, aggregate output (GDP) in the euro area would be 5 percentage points above baseline in 2015”. At the same time sovereign debt levels would be significantly lower with e.g. Greece’s debt level falling below 110% of GDP, more than 40 percentage points below the baseline scenario with market based interest levels. Furthermore, banks would no longer be able to unduly benefit from intermediary profits by borrowing from the ECB at low rates and investing in government bonds at high rates.[246]

Drastic debt write-off financed by wealth tax

Overall debt levels in 2009 and write-offs necessary in the Eurozone, UK and U.S. to reach sustainable grounds

According to the Bank for International Settlements, the combined private and public debt of 18 OECD countries nearly quadrupled between 1980 and 2010, and will likely continue to grow, reaching between 250% (for Italy) and about 600% (for Japan) by 2040.[247] The same authors also found in a previous study that increased financial burden imposed by aging populations and lower growth makes it unlikely that indebted economies can grow out of their debt problem if only one of the following three conditions is met:[248]

  • government debt is more than 80 to 100 percent of GDP;
  • non-financial corporate debt is more than 90 percent;
  • private household debt is more than 85 percent of GDP.

The Boston Consulting Group (BCG) adds that if the overall debt load continues to grow faster than the economy, then large-scale debt restructuring becomes inevitable. To prevent a vicious upward debt spiral from gaining momentum the authors urge policy makers to “act quickly and decisively” and aim for an overall debt level well below 180 percent for the private and government sector. This number is based on the assumption that governments, nonfinancial corporations, and private households can each sustain a debt load of 60 percent of GDP, at an interest rate of 5 percent and a nominal economic growth rate of 3 percent per year. Lower interest rates and/or higher growth would help reduce the debt burden further.[249]

To reach sustainable levels the Eurozone must reduce its overall debt level by €6.1 trillion. According to BCG this could be financed by a one-time wealth tax of between 11 and 30 percent for most countries, apart from the crisis countries (particularly Ireland) where a write-off would have to be substantially higher. The authors admit that such programs would be “drastic”, “unpopular” and “require broad political coordination and leadership” but they maintain that the longer politicians and central bankers wait, the more necessary such a step will be.[249]

Instead of a one-time write-off, German economist Harald Spehl has called for a 30 year debt-reduction plan, similar to the one Germany used after the Second World War to share the burden of reconstruction and development.[250] Similar calls have been made by political parties in Germany including the Greens and The Left.[251][252]

Speculation about the breakup of the eurozone

Economists, mostly from outside Europe and associated with Modern Monetary Theory and other post-Keynesian schools, condemned the design of the euro currency system from the beginning because it ceded national monetary and economic sovereignty but lacked a central fiscal authority. When faced with economic problems, they maintained, “Without such an institution, EMU would prevent effective action by individual countries and put nothing in its place.”[253][254] Some non-Keynesian economists, such as Luca A. Ricci of the IMF, contend the eurozone does not fulfill the necessary criteria for an optimum currency area, though it is moving in that direction.[204][255]

As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit more forcefully, the disbandment of the eurozone. If this was not immediately feasible, they recommended that Greece and the other debtor nations unilaterally leave the eurozone, default on their debts, regain their fiscal sovereignty, and re-adopt national currencies.[256][257]Bloomberg suggested in June 2011 that, if the Greek and Irish bailouts should fail, an alternative would be for Germany to leave the eurozone in order to save the currency throughdepreciation[258] instead of austerity. The likely substantial fall in the euro against a newly reconstituted Deutsche Mark would give a “huge boost” to its members’ competitiveness.[259]Also The Wall Street Journal conjectured that Germany could return to the Deutsche Mark,[260] or create another currency union[261] with the Netherlands, Austria, Finland, Luxembourg and other European countries such as Denmark, Norway, Sweden, Switzerland and the Baltics.[262] A monetary union of these countries with current account surpluses would create the world’s largest creditor bloc, bigger than China[263] or Japan. The Wall Street Journal added that without the German-led bloc, a residual euro would have the flexibility to keepinterest rates low[264] and engage in quantitative easing or fiscal stimulus in support of a job-targeting economic policy[265] instead of inflation targeting in the current configuration.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have, however, on numerous occasions publicly said that they would not allow the eurozone to disintegrate, linking the survival of the euro with that of the entire European Union.[266][267] In September 2011, EU commissioner Joaquín Almunia shared this view, saying that expelling weaker countries from the euro was not an option.[268] Furthermore, former ECB president Jean-Claude Trichet also denounced the possibility of a return of the Deutsche Mark.[269]

Controversies

The European bailouts are largely about shifting exposure from banks and others, who otherwise are lined up for losses on the sovereign debt they recklessly bought, onto European taxpayers.[270][271][272][273][274][275]

EU treaty violations

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No bail-out clause

The EU’s Maastricht Treaty contains juridical language which appears to rule out intra-EU bailouts. First, the “no bail-out” clause (Article 125 TFEU) ensures that the responsibility for repaying public debt remains national and prevents risk premiums caused by unsound fiscal policies from spilling over to partner countries. The clause thus encourages prudent fiscal policies at the national level.

The European Central Bank‘s purchase of distressed country bonds can be viewed as violating the prohibition of monetary financing of budget deficits (Article 123 TFEU). The creation of further leverage in EFSF with access to ECB lending would also appear to violate the terms of this article.

Articles 125 and 123 were meant to create disincentives for EU member states to run excessive deficits and state debt, and prevent the moral hazard of over-spending and lending in good times. They were also meant to protect the taxpayers of the other more prudent member states. By issuing bail-out aid guaranteed by prudent eurozone taxpayers to rule-breaking eurozone countries such as Greece, the EU and eurozone countries also encourage moral hazard in the future.[276] While the no bail-out clause remains in place, the “no bail-out doctrine” seems to be a thing of the past.[277]

Convergence criteria

The EU treaties contain so called convergence criteria. Concerning government finance the states have agreed that the annual government budget deficit should not exceed 3% of thegross domestic product (GDP) and that the gross government debt to GDP should not exceed 60% of the GDP. For eurozone members there is the Stability and Growth Pact which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. Nevertheless the main crisis states Greece and Italy (status November 2011) have substantially exceeded these criteria over a long period of time.

Actors fueling the crisis

Credit rating agencies

Standard & Poor’s Headquarters in Lower Manhattan, New York City

The international U.S.-based credit rating agenciesMoody’sStandard & Poor’s and Fitch—which have already been under fire during thehousing bubble[278][279] and the Icelandic crisis[280][281]—have also played a central and controversial role[282] in the current European bond market crisis.[283] On the one hand, the agencies have been accused of giving overly generous ratings due to conflicts of interest.[284] On the other hand, ratings agencies have a tendency to act conservatively, and to take some time to adjust when a firm or country is in trouble.[285] In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such.[45]

European policy makers have criticized ratings agencies for acting politically, accusing the Big Three of bias towards European assets and fueling speculation.[286] Particularly Moody’s decision to downgrade Portugal’s foreign debt to the category Ba2 “junk” has infuriated officials from the EU and Portugal alike.[286] State owned utility and infrastructure companies like ANA – Aeroportos de PortugalEnergias de PortugalRedes Energéticas Nacionais, and Brisa – Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue.[287][288][289][290] France too has shown its anger at its downgrade. French central bank chief Christian Noyer criticized the decision of Standard & Poor’s to lower the rating of France but not that of the United Kingdom, which “has more deficits, as much debt, more inflation, less growth than us”. Similar comments were made by high ranking politicians in Germany. Michael Fuchs, deputy leader of the leading Christian Democrats, said: “Standard and Poor’s must stop playing politics. Why doesn’t it act on the highly indebted United States or highly indebted Britain?”, adding that the latter’s collective private and public sector debts are the largest in Europe. He further added: “If the agency downgrades France, it should also downgrade Britain in order to be consistent.”[291]

Credit rating agencies were also accused of bullying politicians by systematically downgrading eurozone countries just before important European Council meetings. As one EU source put it: “It is interesting to look at the downgradings and the timings of the downgradings … It is strange that we have so many downgrades in the weeks of summits.”[292]

Regulatory reliance on credit ratings

Think-tanks such as the World Pensions Council have criticized European powers such as France and Germany for pushing for the adoption of the Basel II recommendations, adopted in 2005 and transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, this forced European banks and more importantly theEuropean Central Bank, e.g. when gauging the solvency of EU-based financial institutions, to rely heavily on the standardized assessments of credit risk marketed by only two privateUS agencies- Moody’s and S&P.[293]

Counter measures

Due to the failures of the ratings agencies, European regulators obtained new powers to supervise ratings agencies.[282] With the creation of the European Supervisory Authority in January 2011 the EU set up a whole range of new financial regulatory institutions,[294] including the European Securities and Markets Authority (ESMA),[295] which became the EU’s single credit-ratings firm regulator.[296] Credit-ratings companies have to comply with the new standards or will be denied operation on EU territory, says ESMA Chief Steven Maijoor.[297]

Germany’s foreign minister Guido Westerwelle has called for an “independent” European ratings agency, which could avoid the conflicts of interest that he claimed US-based agencies faced.[298] European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U.S.-based ratings agencies have less influence on developments in European financial markets in the future.[299][300] According to German consultant company Roland Berger, setting up a new ratings agency would cost €300 million. On 30 January 2012, the company said it was already collecting funds from financial institutions and business intelligence agencies to set up an independent non-profit ratings agency by mid 2012, which could provide its first country ratings by the end of the year.[301] In April 2012, in a similar attempt, the Bertelsmann Stiftung presented a blueprint for establishing an international non-profit credit rating agency (INCRA) for sovereign debt, structured in way that management and rating decisions are independent from its financiers.[302]

But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. Some European financial law and regulation experts have argued that the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on ratings agencies (Regulation EC N° 1060/2009) has had little effect on the way financial analysts and economists interpret data or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients”[303]

Media

There has been considerable controversy about the role of the English-language press in regard to the bond market crisis.[304][305]

Greek Prime Minister Papandreou is quoted as saying that there was no question of Greece leaving the euro and suggested that the ­crisis was politically as well as financially motivated. “This is an attack on the eurozone by certain other interests, political or financial”.[306] The Spanish Prime Minister José Luis Rodríguez Zapatero has also suggested that the recent financial market crisis in Europe is an attempt to undermine the euro.[307][308] He ordered the Centro Nacional de Inteligencia intelligence service (National Intelligence Center, CNI in Spanish) to investigate the role of the “Anglo-Saxon media” in fomenting the crisis.[309][310] [311] [312] [313] [314] [315] So far no results have been reported from this investigation.

Other commentators believe that the euro is under attack so that countries, such as the U.K. and the U.S., can continue to fund their large external deficits and government deficits,[316]and to avoid the collapse of the US dollar.[317][318][319] The U.S. and U.K. do not have large domestic savings pools to draw on and therefore are dependent on external savings e.g. from China.[320] [321] This is not the case in the eurozone which is self funding.[322] [323]

Speculators

Both the Spanish and Greek Prime Ministers have accused financial speculators and hedge funds of worsening the crisis by short selling euros.[324] [325] German chancellor Merkel has stated that “institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere.”[326]

According to The Wall Street Journal several hedge-fund managers launched “large bearish bets” against the euro in early 2010.[327] On February 8, the boutique research and brokerage firm Monness, Crespi, Hardt & Co. hosted an exclusive “idea dinner” at a private townhouse in Manhattan, where a small group of hedge-fund managers from SAC Capital Advisors LP,Soros Fund Management LLC, Green Light Capital Inc., Brigade Capital Management LLC and others argued that the euro was likely to fall to parity with the US dollar and were of the opinion that Greek government bonds represented the weakest link of the euro and that Greek contagion could soon spread to infect all sovereign debt in the world. Three days later the euro was hit with a wave of selling, triggering a decline that brought the currency below $1.36.[327] There was no suggestion by regulators that there was any collusion or other improper action.[327] On 8 June, exactly four months after the dinner, the Euro hit a four year low at $1.19 before it started to rise again.[328] Traders estimate that bets for and against the euro account for a huge part of the daily three trillion dollar global currency market.[327]

The role of Goldman Sachs[329] in Greek bond yield increases is also under scrutiny.[330] It is not yet clear to what extent this bank has been involved in the unfolding of the crisis or if they have made a profit as a result of the sell-off on the Greek government debt market.

In response to accusations that speculators were worsening the problem, some markets banned naked short selling for a few months.[331]

Odious debt

Main article: Odious debt

Some protesters, commentators such as Libération correspondent Jean Quatremer and the Liège based NGO Committee for the Abolition of the Third World Debt (CADTM) allege that the debt should be characterized as odious debt.[332] The Greek documentary Debtocracy examines whether the recent Siemens scandal and uncommercial ECB loans which were conditional on the purchase of military aircraft and submarines are evidence that the loans amount to odious debt and that an audit would result in invalidation of a large amount of the debt.

National statistics

In 1992, members of the European Union signed an agreement known as the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures.[29][30] The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties.[29] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives—including greater access to government guarantees—while minimizing disclosure to broader financial markets.[333]

The revision of Greece’s 2009 budget deficit from a forecast of “6–8% of GDP” to 12.7% by the new Pasok Government in late 2009 (a number which, after reclassification of expenses under IMF/EU supervision was further raised to 15.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis.

This added a new dimension in the world financial turmoil, as the issues of “creative accounting” and manipulation of statistics by several nations came into focus, potentially undermining investor confidence.

The focus has naturally remained on Greece due to its debt crisis. There has however been a growing number of reports about manipulated statistics by EU and other nations aiming, as was the case for Greece, to mask the sizes of public debts and deficits. These have included analyses of examples in several countries [334] [335] [336] [337] or have focused on Italy, [338]the United Kingdom, [339] [340] [341] [342] [343] [344] [345] [346] Spain, [347] the United States, [348] [349] [350] and even Germany. [351] [352]

Collateral for Finland

On 18 August 2011, as requested by the Finnish parliament as a condition for any further bailouts, it became apparent that Finland would receive collateral from Greece, enabling it to participate in the potential new €109 billion support package for the Greek economy.[353] Austria, the Netherlands, Slovenia, and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the eurozone, or a similar deal with Greece, so as not to increase the risk level over their participation in the bailout.[354] The main point of contention was that the collateral is aimed to be a cash deposit, a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout, which means Finland and the other eurozone countries guarantee the Finnish loans in the event of a Greek default.[355]

After extensive negotiations to implement a collateral structure open to all eurozone countries, on 4 October 2011, a modified escrow collateral agreement was reached. The expectation is that only Finland will utilise it, due to i.a. requirement to contribute initial capital to European Stability Mechanism in one installment instead of five installments over time. Finland, as one of the strongest AAA countries, can raise the required capital with relative ease.[356]

At the beginning of October, Slovakia and Netherlands were the last countries to vote on the EFSF expansion, which was the immediate issue behind the collateral discussion, with a mid-October vote.[357] On 13 October 2011 Slovakia approved euro bailout expansion, but the government has been forced to call new elections in exchange.

In February 2012, the four largest Greek banks agreed to provide the €880 million in collateral to Finland in order to secure the second bailout program.[358]

Political impact

Handling of the ongoing crisis has led to the premature end of a number of European national governments and impacted the outcome of many elections:

  • Finland – April 2011 – The approach to the Portuguese bailout and the EFSF dominated the April 2011 election debate and formation of the subsequent government.
  • Greece – November 2011 – After intense criticism from within his own party, the opposition and other EU governments, for his proposal to hold a referendum on the austerity and bailout measures, PM George Papandreou announced his resignation in favour of a national unity government between three parties, of which only two currently remain in the coalition. Meanwhile, the popularity of Papandreou’s PASOK party dropped from 42.5% in 2010 to as low as 7% in some polls in 2012. Following the vote in the Greek parliament on the austerity and bailout measures, which both leading parties supported but many MPs of these two parties voted against, Papandreou and Antonis Samaras expelled a total of 44 MPs from their respective parliamentary groups, leading to PASOK losing its parliamentary majority. Early elections are likely to be held in 2012.
  • Ireland – November 2010 – In return for its support for the IMF bailout and consequent austerity budget, the junior party in the coalition government, the Green Party set a time-limit on its support for the Cowen Government which set the path to early elections in Feb 2011.
  • Italy – November 2011 – Following market pressure on government bond prices in response to concerns about levels of debt, the Government of Silvio Berlusconi lost its majority, resigned and was replaced by the Government of Mario Monti.
  • Portugal – March 2011 – Following the failure of parliament to adopt the government austerity measures, PM José Sócrates and his government resigned, bringing about early elections in June 2011.
  • Slovakia – October 2011 – In return for the approval of the EFSF by her coalition partners, PM Iveta Radičová had to concede early elections in March 2012.
  • Slovenia – September 2011 – Following the failure of June referendums on measures to combat the economic crisis and the departure of coalition partners, the Borut Pahorgovernment lost a motion of confidence and December 2011 early elections were set, following which Janez Janša became PM.
  • Spain – July 2011 – Following the failure of the Spanish government to handle the economic situation, PM José Luis Rodríguez Zapatero announced early elections in November. “It is convenient to hold elections this fall so a new government can take charge of the economy in 2012, fresh from the balloting” he said. Following the elections, Mariano Rajoybecame PM.

See also

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Categories: EU Observation Tags: , ,

The maths behind the madness

April 20, 2012 Leave a comment

Graphic detail

via The maths behind the madness.

Our interactive guide to reducing government debt

AFTER a brief hiatus, the euro crisis is back. Spain’s ten-year borrowing costs have been hitting highs not seen since the European Central Bank began injecting €1 trillion ($1.3 trillion) of cheap money into the banking system in December. The country managed to auction €2.5 billion worth of bonds on April 19th, but paid 5.7% for ten-year money, 30 basis points higher than the last auction in January.

At what point does the debt of a nation become unsustainable? Our interactive graphic above shows the IMF’s latest forecasts for government gross debt as a percentage of GDP through to 2017. It also allows you to input your own long-term assumptions to project the likely path of debt out to 2020.

There are two things that matter in government-debt dynamics: the difference between real interest rates and GDP growth (r-g), and the primary budget balance as a % of GDP (ie, before interest payments). In any given period the debt stock grows by the existing debt stock (d) multiplied by r-g, less the primary budget balance (p).

The simple r-g assumption is one of the most important in debt dynamics: an r-g of greater than zero (when interest rates are greater than GDP growth) means that the debt stock increases over time. An r-g of less than zero causes it to fall.

Our interactive model uses the nominal interest rate (i)—approximately equivalent to the ten-year bond yield—and allows you to input your own inflation rate, ∏. Inflation helps reduce the total debt stock over time, by reducing the real value of debt. In our model and using approximations, r-g becomes i – ∏ – g. The greater the inflation rate, the lower r-g becomes.

The second consideration is the primary budget balance. A primary budget surplus causes the debt stock to fall, by allowing the government to pay off some of the existing debt. A primary deficit needs to be financed by further borrowing. As European peripheral countries have found out to their cost, interest rates increase when governments run large budget deficits, and as they do it becomes increasingly difficult to reduce r-g to a sustainable level.

In reality, these variables are all related. When inflation rises, for instance, bondholders will expect a higher nominal interest rate on new debt. If a country runs a larger primary surplus, the interest rate it is forced to pay may fall. Adjustments in countries’ deficits will also affect their growth rates. To keep matters simple, we have ignored these interactions. Our calculator shows the evolution of a government’s debt stock based directly on the values for inflation, growth, interest rates and the primary deficit that you determine.

Just small tweaks in these figures can have striking results. Using the average IMF forecasts for 2012-17, Spain’s debt is expected to rise from 69% of GDP in 2011 to 107% in 2020. If you increase the interest rate by just two percentage points to 7.1%, the debt level rises to 124%.

Categories: US Observation Tags: ,

Argentina’s oil nationalisation and Brazilian interest rates

April 20, 2012 Leave a comment

中国需要出台“4万亿2.0”刺激政策吗?

April 20, 2012 Leave a comment

马光远

via 中国需要出台“4万亿2.0”刺激政策吗?.

413日,国家统计局公布了中国第一季度宏观经济数据,GDP较上年同期增长8.1%,增速不仅创下了2009年第二季度以来的最低水平,而且大大低于此前外界的普遍预期的8.3%的中值。

8.1%数字本身来看,在某种程度上的确印证了大家对中国经济的担忧,《华尔街日报》和英国《金融时报》近期都在讨论,在经济增速明显下滑的情况下,属于中国的“派对”是否已经结束。而国内的一些学者和机构更是危言耸听的预判中国实体经济处于崩溃的边缘,要求放松调控,释放流动性,重启以房地产和汽车等为主导的“4万亿2.0”的刺激政策,防止经济进一步下滑。

事实上,长期以来,对于中国经济的“数字化解读”,观点和视角之多总是和万花筒一样令人眼花缭乱,而很多观点的背后充满了武断和缺乏实际支撑的一家之言,甚至不乏明显出于行业利益考量的奇谈怪论。一季度8.1%的增速究竟代表了中国经济的稳健回落,还是经济状况真如一些人判断的一团糟,恐怕最终仍然要回到中国经济的实际去寻找答案,而不是在观点、利益和武断的支配下故作惊人之语。的确,从一个层面看,一季度中国宏观数据不可谓不惊险:工业增加值增速下滑,一些地方财政收入出现了罕见的负增长,前两个月全国规模以上工业企业利润同比下降5.2%,一些地方新政增房地产投资下滑明显,进出口增速更是回落到个位数,这对于长期以来习惯于“大数字”的中国而言,的确很不习惯。

然而,从另一个层面而言,中国一季度宏观数据并并没有渲染的那么糟糕,三驾马车除了进出口增速回落明显外,固定资产投资同比名义增长20.9%(扣除价格因素实际增长18.2%),全国房地产开发投资10927亿元,同比名义增长23.5%(扣除价格因素实际增长20.7%),消费保持了14%以上的正常增速。如果站在一个客观的立场,在国际国内因素极其复杂的形势下,能够取得8.1%的增长实属不易,这个数字不仅远远高于欧美等发达国家的增速,也高于印度6.4%的增长,当然也高于今年7.5%的增长目标。而且,从统计局公布的产业的具体数据,包括发电量等看,8.1%的增速是绝非一个难看的不可接受的数字。可以说,经济增速的回落,既是内外客观因素交织的结果,也是中央继续主动调控政策的结果。

同时,从今年经济增长的趋势看,1季度可以说是全年宏观经济最不确定、最困难的阶段,从前三个月的环比数据看,无论是财政收入的增长,还是进出口数据,还是PMI指数,环比复苏的态势也比较明显,宏观经济数据在一季度见底是个大概率事件。随着“两会”之后一些政策的落实和微调,宏观经济回升的预期是乐观的。但是,对于习惯了更加漂亮数据模式的中国经济的人而言,一季度的数据却让他们极为悲观,他们呼吁出台新的经济刺激计划,从他们建言的内容看,无非是2008年底“4万亿”刺激计划的一个翻版,无非是再一次放松货币政策,防松房地产调控,通过加大政府投资稳定增长。很显然,如果真的出台这样的举措,宏观经济的数字肯定会更加漂亮,但这种刺激政策的负面效应之大,成本之高,对中国宏观经济长期稳定、健康、持续的发展造成了破坏力之大,这两年不仅被高层深刻理解,更为普通老百姓理解。08年“4万亿”刺激计划刺激出来的通胀、房地产泡沫以及巨额的政府债务和一些仓促上马工程的停工,尚在艰难消化,如果重复以前的老路,不仅政府财政无法承受,中国的经济自身也根本无力承受。

不可否认,中国经济存在着极大的困难和挑战,实体经济的不振,中小企业的困局,提振内需的艰难以及深层领域的改革,特别是发展模式的转型和经济结构的调整面临的挑战,都是前所未有的。但很显然,即使出台“4万亿2.0”的刺激政策,除了可以换得短期的好看数据和心理的欢愉之外,对于解决实体经济和中小企业长期发展的问题不仅没有帮助,反而会让因为拖延解决,使得这些困难和问题更加严重。过去几年的事实证明,凡是扩大政府投资,凡是刺激房地产,不仅无助于中国经济深层矛盾和问题的解决,而且会导致这些问题的更加恶化。中国经济之病绝不在于经济的增速,过度关注经济增速的观念不仅过时,而且对中国经济的健康是有很大的危害的。

解决中国经济目前的困难,道路可谓千千万,但唯有再次放松房地产调控、明显放松货币的举措是和解决这些困难背道而驰的。去年的中央经济工作会议,提出振兴实业,提出开放民间投资,提出战略新兴产业,提出加大减税的力度,提出在一些关键领域的改革要取得突破,这些无疑都是正确的举措,也是真正解决中国经济“不可持续、不平衡、不协调、不稳定”等痼疾的良方。而今年的政府工作报告又将GDP的增速确定为7.5%,也是放弃过于功利的速度,而将政策的着力点放到中国经济的长期稳定健康的发展上。最近温州的金融试验改革,就是为中国经济的未来探索一条金融扶持中小企业发展的道路,这些探索,需要坚持,需要耐心,需要放弃急功近利的思维,而不是一有风吹草动就惊慌失措,就改变既定的方针政策,这是中国经济之大忌。

中国经济的基本面并不坏,中国经济的中长期发展也是可以期待的,但中国经济的未来取决于发展模式的转型、取决于结构调整的推动,取决于关键领域的改革,取决于反垄断的实施,取决于大规模的减税和对中小企业的扶持政策,而不是速度。中国经济不是快餐,不是廉价的肥皂剧,只顾眼前的快乐,而看不到未来的痛苦。高层一直强调不折腾,强调埋头苦干,而我们却总是为一时的快感而冲动。中国应该主动告别“明星经济”,告别瞩目的数字,忍受寂寞,为了更健康的未来做点有意义的事。

 

Categories: China Observation, Economy Tags: ,

World Perspectives

April 19, 2012 Leave a comment

by Mick Brooks (Marxist economist)

18.01.12

The past year (2011) has seen a torrent of news items. It’s all happening! The coming year is likely to be just as eventful. It is quite clear that a new and significant period is opening up in the world economic and political situation. The reason for this flood of events is simple. We are living through the most momentous crisis of capitalism in our lifetime. The old order is being shaken to the core.

It is the task of Marxists to try to peer below the surface of events and make sense of the processes at work. The role of perspectives is to see what stage we are passing through and the general direction that the world is moving in. This is extraordinarily difficult at present. One cannot simply say that the world is moving left or that it is moving to the right. The processes we observe are contradictory. The direction that events are taking is not immediately obvious.

In fact that is what we should expect. On account of the deep economic crisis both revolutionary and counter-revolutionary trends are in the process of crystallisation. We are moving into a new political era, one in which revolutionary opportunities are opening up.

The post-War boom

The period immediately after the Second World War saw the biggest secular boom that capitalism has ever gone through. It was characterised by virtually full employment and steadily rising working class living standards, at least in the advanced capitalist countries. Though this was a period of relative class peace, the working class was enormously strengthened by the boom in capitalism. In the colonial countries there was an enormous movement for national liberation. This movement swept up millions of people into thinking, acting and risking their lives for a political cause for the first time. The post-War boom lasted from 1948 to 1973, when we saw the first generalised recession since the War. By this time formal independence had been achieved in almost all the former colonies.

It should be emphasised that, for workers in the advanced capitalist countries, this was a protracted non-revolutionary period. Illusions were widespread that capitalism had solved all its problems, that crises were a thing of the past, and that living standards for the vast majority under capitalism would keep going up for ever. In this situation reformist ideas were almost universal, the level of activity and involvement in the labour movement was very low and the forces of Marxism were reduced to a handful. In addition the Stalinist states were perceived as growing faster than most capitalist countries, so they seemed to provide a viable alternative to capitalism to many left-inclined militants. The bureaucracy was utterly dominant in the trade unions and the political parties of the working class.

At the same time the capitalist economies were slowing down even before the shock of the 1973-4 recession. Full employment had improved the bargaining power of organised labour so that workers had become used to getting their way by going on strike. The labour movement from the later 1960s cashed in the strength it had built up during the post-War boom with militant struggles to defend and improve its living standards, as in France in 1968 and Italy in 1969.

Capitalist offensive

The recession of 1973-4 acted as a shock to the working class. It was followed a few years later by another deep slump in 1980-2. Full employment disappeared forever and, with it, the strong bargaining position of the unions vis a vis the bosses. The period after the recession was completely different from the post-War boom. Capitalism was in deep economic and political difficulties. The system slowed down and stalled. It could no longer deliver the goods to the working class.

This put the social democratic and Stalinist bureaucracy in the labour movement in a tricky position. It was no longer a matter of negotiating reforms and improvements in wages, but of defending what the workers had gained in previous decades. This required a revolutionary challenge to the capitalist system, which the bureaucrats were unwilling to offer. On the other hand the critical situation forced the workers on to the road of struggle. Revolutionary possibilities opened up for the first time in one country after another.

The ruling class rearmed. They abandoned the consensual economic policies of Keynesianism aimed at delivering full employment. Indeed Keynesianism was seen to have failed in the economic crises of the 1970s. Instead the ruling class adopted monetarism. This was actually the old traditional capitalist economic policy. Monetarists argue that governments cannot affect the level of economic activity and employment, and should not even try. The election of Margaret Thatcher in Britain in 1979 and of Ronald Reagan in the USA marked the turn to an aggressive class struggle by the capitalist class, as recognition of the new situation confronting their system.

Reagan, in what was virtually his first act as President, sacked the entire cohort of striking air traffic controllers. The leaders of their union PATCO were paraded on television in leg manacles. Later Thatcher took on the British miners and, after a one year long strike, destroyed the union and the coal industry. The miners were regarded as the ‘brigade of guards’ of the British labour movement. Their defeat inaugurated years of further defeats and relative industrial quiescence. It was a period of ruling class onslaught and widespread fear at the workplace. In both Britain and the USA trade union membership fell significantly from its peak in the later 1970s.

Let us be clear. There was a real prospect of the overthrow of capitalism in several countries in the 1970s. This would have been the beginnings of a global change in the direction of the socialist transformation of society. By the mid-1980s this opportunity had been beaten back almost everywhere. The labour movement went through serious defeats in one country after another. The tide of militancy was rolled back and for years the capitalist class went on the offensive. The collapse of Stalinism, discussed later, provided the coping stone for capitalist triumphalism. There seemed no alternative to capitalism.

That period of defeats and reaction has now come to an end. The ruling class are no longer so self-confident on account of the economic crash. They are desperate. They are all the more determined to defend their system at the expense of the working class. The situation also opens up opportunities for revolutionaries. The rottenness of the traditional leadership of the working class laid the ground for defeats. It also exposed them and weakened their ascendancy in the movement. We have the opportunity to build from the ground up.

We revolutionaries see new prospects opening up before us. The reason for the failure of the movements from the late 1960s till the early 1980s was the lack of the subjective factor, the lack the mass Marxist parties. The opportunities are now opening up for us to build such parties. The need for an alternative is certainly there, and will increasingly be felt by more and more workers as the crisis unfolds.

The Great Recession

The period since 1974 has been completely different in every respect from that of the post-War boom. In retrospect 1948-73 can be seen as a uniquely favourable period of capitalist development for the working class. The period since then has been far more typical of what capitalism has to offer working people. Mass unemployment has returned along with slower economic growth and, with it, vicious attacks on working class organisations by the capitalist class.

Since the onset of the Great Recession in 2008 we seem to have entered a new and different era from that of 1974-2007. Governments of all political persuasions responded to the crisis by hurling enormous sums of taxpayers’ money at the banks in a desperate attempt to save capitalism. Clearly this was an abandonment of the dominant ideology of neoliberalism. But it was not a return to Keynesianism. Money was pumped into the economy not to create jobs for the working class, but to save capitalism from itself. This was socialism for the rich – and nobody else. The money was not spent on useful public works. It was used to buy up toxic pieces of paper that had been issued by the banks and poisoned capitalism’s bloodstream. The toxic securities were bought up and in effect buried deep in the ground like nuclear waste.

The period opening up is likely to be one of unrelieved austerity. The body of the world economy has been severely weakened by the Great Recession. Further rounds of bloodletting of jobs have been prescribed by the major capitalist powers. Public debts and deficits have ballooned. But this public money hasn’t been spent on public services or reforms for the working class. It has been used to bail out capitalism. The workers, having paid in lost jobs and wages in the first round of the crisis, are being asked to pay again – this time in the form of attacks on public sectors jobs and services to reduce the debts. The main capitalist economies are crawling ahead if they are not rolling backwards. Prosperity and full employment is a distant dream.

The Arab spring

The most important political event of the past year (2011) was the Arab spring. How far was this upsurge a direct result of the economic crisis? How far was it the product of a random spark? The Middle East, like most underdeveloped countries, had been held back by continued imperialist domination ever since formal independence. Poverty and mass unemployment are chronic features of most Arab countries, apart from a handful of thinly populated oil rich states. The crisis made conditions suddenly worse. But there is no automatic connection between economic hardship and political radicalisation.

The eruptions in Tunisia which kicked the movement off were the result of the rottenness of the Ben Ali regime, which had long been evident to the mass of the Tunisian people. A young man burned himself to death in protest against the exactions of the regime. This was an apparently random incident which provoked a revolutionary explosion because the conditions had matured below the surface. In the same way the riots by women in bread queues in Petrograd that marked the beginning of the Russian Revolution in 1917 seemed to be ‘accidental’ factors. In fact they marked the beginning of the end of the centuries’ old rule of the Tsar over Russia and of the world’s first socialist revolution. Lenin and Trotsky could later identify the incident as evidence that capitalism, stretched to breaking point by World War, was fracturing at its weakest link. The fact that the Arab spring spread so rapidly to Egypt and other countries in the region was evidence that the shock of the crisis provided a tipping point for the revolutionary conditions that had long been in preparation below the surface of events.

The Arab spring represents a gigantic step forward. Consider the common opinion of the imperialist powers only a year ago. They considered that the whole Arab world was securely under the grip of dictatorships of various kinds. All of these regimes held the common people down in the interests of imperialism. Even in January 2011 Hillary Clinton and Tony Blair were praising the Mubarak regime as a safe bastion in the region. It was assumed in a racist manner that the Arab peoples were uninterested in democracy and would never rise up against their oppressors.

All the same it is clear the revolution, for that is what it is, will be a protracted process. Though we have a long way to go, the events so far have shaken the Arab nations and the wider world, and the grip of imperialism in the region, to the core. The workers and peasants have stepped on to the stage of history as independent players. That is of lasting significance.

Comparing the Egyptian and Russian Revolutions

We often use the events of the Russian Revolution as a template to analyse contemporary revolutionary events. The Russian Revolution unfolded in nine months over two main acts. The February Revolution overthrew the Tsar, the head of the old order. It is conventionally described as a spontaneous uprising of the common people in the big cities. The army was split, refusing to fight the revolutionaries, and thus rendered useless as a force for repression by the Tsar. Soviets, potential organs of workers’ power, were set up in the course of the insurrection.

The February Revolution was seen as leaderless. In fact as Trotsky showed in his ‘History of the Russian Revolution’, worker Bolsheviks played a leading role in the Revolution at rank and file level, though not under the direction of the Bolshevik Party leadership, which was mainly working underground or abroad.

The Revolution instituted a period of dual power, with the Soviets and the bourgeois Provisional Government representing the two possible options for Russian society. Initially the Soviets were dominated by moderate socialist parties who sought to prop up the Provisional Government. The Bolshevik Party already had a cadre rooted in the working class from the previous revolutionary struggles of 1905. They were able to take advantage of the revolutionary situation in Russia, given the utter failure of the Provisional Government to solve the basic problems faced by the masses, to build themselves up as a mass Party very quickly. In nine months they won a majority in the Soviets and took power on behalf of the workers and peasants.

The similarities and differences with the Arab spring are plain. We shall mainly use the Egyptian case, as Egypt is the key country in the Arab world because of its size and the relative weight of the working class.

The movement in Egypt was fed in particular by the masses of unemployed youth created by the longstanding failures of the Mubarak regime to break with imperialism, develop the country and create jobs. Here is an illustration of the country’s plight and the background to the mass movement that erupted. Nearly half the population, 44% of Egyptians, live in absolute poverty on less than $2 per day. Food prices went up by 30% in the year before the uprising. Between 2000 and 2009 the country’s debt grew by 15%, despite repaying $24.6bn in loans over the period. The net transfer from Egypt to the rich countries was $3.4bn over the decade.

The working class did not play a leading role in the overthrow of Mubarak as workers, though of course they were there in large numbers in Tahrir Square. Some commentators characterise the movement in Tahrir Square as a middle class movement. This is quite wrong. It was an urban movement of the mass of the people in Cairo. The same process occurred in other cities.

The workers did not use the method of the strike against the regime in 2011, though the Egyptian Revolution had been prepared by years of a bitter and significant strike wave. There were 3,000 labour actions between 2004 and 2010. Particularly prominent was the textile industry in Mahalla (where Misra Spinning and Weaving mill employs 27,000 workers) which saw a wave of militancy from 2006 to 2008. This was already a clear sign that the Mubarak regime was on the rocks.

The repression of the old regime was aimed in large part against the working class, restricting their power to take independent action against the bosses on the shop floor. The Egyptian Trade Union Federation was a tool of the regime. After the overthrow of Mubarak, independent trade unions have been set up. There was a wave of militant strikes to kick out the ‘little Mubaraks’ in the workplace who had lorded it over the workers for so long. In time this movement ran into the sand. The reason for this was that the regime remained basically intact. The Egyptian Revolution has begun, but the overthrow of Mubarak was only the first act.

The armed forces were not neutralised by the movement, though this was beginning to happen. The ranks were increasingly unwilling to do Mubarak’s dirty work of repression. The army heads clearly recognised that a rebellion was on the verge of occurring in January 2011. They sacrificed Mubarak as a generous (and necessary) gesture to the masses in order to maintain their own control over the rank and file soldiers and prevent a complete meltdown of the old order.

Though the assemblies of people in the process of emancipating themselves in Tahrir Square inspired workers all over the world, they did not produce organs of workers’ power. The army is still intact. There was no revolutionary cadre like the Bolshevik Party capable of taking advantage of the revolutionary possibilities in a short period of time. For these reasons the Egyptian Revolution will be a protracted process.

Islamic parties

From secular nationalism to Islamism

Revolutionary events shot from country to country. This interconnection of the Arab world indicates that a powerful pan-Arab consciousness still exists. This is despite repeated failed attempts to build a united Arab republic, going back to the time of Nasser. Nasser was one of a generation of secular, progressive politicians, often using socialist rhetoric, fighting for independence, modernisation and an advance in living standards for the whole Arab world. This was the dominant political trend at this time. Islamism was seen as obscurantist and subservient to imperialism. Nasser and his generation of independence fighters and leaders could not achieve what they wanted as long as imperialism continued to exist. They failed because they failed to break the power of capitalism in the region.

In later years resistance to the status quo of poverty and imperialist domination tended to be voiced by the Islamist opposition, in contrast to imperialist puppets like Mubarak. Grotesquely, Al Qaeda at one time proclaimed itself the only opposition to imperialism in the Muslim world. Al Qaeda has of course has achieved nothing but damage and chaos. The emergence of the mass movement, a concept they don’t understand, has shown them to be useless and divisive.

In fact, so far from leading the revolutions, Islamist parties such as the Egyptian Muslim Brotherhood have been completely confounded by the revolutionary developments in the region. They have had the advantage that they are the most well-known opposition element and have been active on the ground for decades. But now they have had to run fast to catch up. The Muslim Brotherhood is likely to emerge as the largest single party out of the 2012 elections. That is a measure of the rural backwardness that has to be overcome in Egypt, and of the lack of a socialist tradition.

This is not a new phenomenon. In the 1848 revolutions Marx and Engels lamented the failure of the mood in the countryside to keep up with the towns. After the overthrow of the military junta in Greece in 1974 and the ending of Franco’s rule in Spain, the first beneficiaries of elections were conservative parties. Conservative parties in Muslim countries naturally take on an Islamic tinge as that is the dominant religion. A period of dictatorship is a period when the development of class consciousness is deliberately held back. It takes time to catch up.

9/11

The Al Qaeda outrage at the twin towers was the most spectacular instances of terrorist activity ever. It was also one of the defining incidents of the new millennium. It led inexorably to a sequence of events where imperialism struck back, eventually hunting down and murdering Osama bin Laden. 9/11 was an event which armed imperialism with excuses to intervene, repress and kill. It led directly to the invasion of Afghanistan and the destabilisation of the region. Ironically the final outcome of the imperialist invasion is likely to be a fiasco which leaves the Taliban firmly installed in control of the country.

Al Qaeda has shown itself to be a counter-revolutionary force; 9/11 served to throw the real movement back. Though it can continually harry imperialism, Al Qaeda cannot strike decisively against it. A handful of fanatics try to substitute themselves for the effects of a mass movement. The Muslims who bomb Christian churches in Nigeria are also serving to split the working class movement on religious lines. In the context of a unified movement against rising fuel prices, because of the removal of subsidies at the beginning of 2012, that was a doubly criminal act.

Varieties of Islamism

The imperialist powers continually express fear at the rise of Islamism in the region and the wider world. Developments like the Iranian Revolution are unlikely to recur. What happened in 1979 was a huge, genuinely revolutionary movement against the Shah, a movement in which the working class was playing a leading part. The revolution was hijacked by Khomeini and the clerics. The Tudeh Party allowed them to hijack the revolution, because it was a ‘communist’ party and adhered to the Stalinist theory of stages. They saw the revolution as national democratic, with the aim of setting up a democratic republic. This, of course, was the Menshevik position in 1917. In fact the overthrow of the Shah could have been the first act in a socialist revolution, as the deposing of the tsar was in 1917. Khomeini only gained power because the labour movement’s leadership failed. The working class paid a heavy price thereafter.

Khomeini spouted anti-imperialist rhetoric, but capitalism is unchallenged in Iran, and the condition of the masses is desperate. Islamism is a twisted form of anti-imperialism. It can only gain credibility because of the failure of the labour movement to offer a way forward. Islamism is always and everywhere an enemy of the working class movement, as the events in Iran showed. Islamism in that regard is no different from any other political movement founded on religious beliefs – whether Christian, Sikh, Hindu or Buddhist.

One thing all these religious parties have in common is that they are all bourgeois. Reactionary parties often take on the coloration of the dominant religion in the country. We Marxists recognise that the main division in society, and the cause of conflicting political ideas, is the existence of social classes with different and opposing interests. Any political movement based on religion tries to cover over the real conflicts in society, at best with soothing words, at worst with repression.

The Muslim Brotherhood is in any case not the same as the Iranian clerics. Islamism is not a unified movement. There are huge differences between movements described as Muslim, between the moderates who aspire to be elected and the fanatical bombers. The Brotherhood presented itself as a reformist opposition to Mubarak, and gained a limited tolerance from the regime as a result. After its downfall it strives (through the Freedom and Justice Party) to present itself as a party accepting the new constitution (which leaves the power of the military unfettered) and with no ambitions to be the sole party of government.

In this it seems to be following the ‘softly, softly’ example of the Turkish Justice and Development Party, which took on the armed forces, followers of the militantly secular Kemal Ataturk, founder of modern Turkey. The JDP finally got elected and is attempting to nudge Turkey in the direction of a Muslim country, while opening the country up completely to global capitalism.

The new movement in Egypt, typified by the huge assemblies of people in Tahrir Square who challenge continued military rule, the people who actually made the revolution, are no part of this Islamist movement and will have nothing to do with it. They are not overtly socialist and not led by the working class. But they are secular, intelligent and open to new ideas. They will learn fast.

Perspectives for the Middle East

Tunisia

The first lightning of the Arab Revolution was seen in Tunisia. The speed with which things developed, beginning with a young man burning himself to death in protest, to the enforced exit of Ben Ali and his family after 24 years of apparently impregnable rule, was remarkable. The apparent establishment of bourgeois democracy in the country with elections before the end of 2011 cannot be seen as the end of the affair. Further developments in Tunisia depend on what happens in the rest of the region.

Libya

Developments in other countries have followed a very different course from Egypt. The reason for this is that the weight of the working class in society is relatively much less elsewhere in the region. Libya was created as a unified country only quite recently, and strong regional identities persist. The fact that the insurrection against Gaddafi began in Benghazi and spread gradually to Tripoli is an indication of this. In fact the opposition to the regime appears to have had no common thread apart from an entirely understandable hatred of Gaddafi.

The rising took a developed differently from Egypt. Rather than powered by enthusiastic assemblies of millions of people in the cities, it was conducted by militias in pick-up trucks blazing away with AK-47s in the desert. It took the form of an armed civil war.

It is not completely correct to say that the rebels were all just stooges of imperialism, though Western bombing was vital to their victory. The motivations of the rebels were mixed. Individual motivations in any case do not determine the class character of a movement. No doubt sincere revolutionary democrats took part in the struggle against Gaddafi. But they were drowned in a movement dominated by local, tribal and religious loyalties and by business people who chafed at the restrictions on their activities imposed by the regime.

In this situation there is no reason why revolutionaries should support either side. How can a revolutionary intervene politically in a militia in any case? It is difficult, though not impossible.

Marxists cannot be neutral when imperialism intervenes. We oppose imperialist intervention, whatever the ‘humanitarian’ pretext. Western bombing killed uncounted thousands of innocent civilians in Libya and must be denounced.

The Western powers had made big steps to incorporate the Gaddafi regime into the structures of world imperialism before the civil war. Though Gaddafi has made anti-imperialist gestures in the past, he welcomed the recent rapprochement. The conflict broke out unexpectedly to the NATO powers, and they opportunistically seized the opportunity to oust Gaddafi instead of embracing him. Their aim was Libyan oil – no doubt about that.

The rebel government is by all accounts still a rabble, with militias driving round Tripoli and looting. No doubt over time the businessmen who had rebelled against the Gaddafi regime, and were an important part of the insurgency, will gain the ascendancy and impose a government more subservient to imperialism on the country. Already the oil booty, which previously was effectively the property of the Gaddafi family, is being divided up between the imperialist powers.

Syria

Developments in Syria are more similar to those in Libya than Egypt. There have been mass movements in cities –particularly Homs and Hama ­– but also armed insurrection by army rebels. The movements in these cities seem to have mainly been fed by religious dissent. The majority Sunni population feel themselves to be oppressed by the Assad regime. Though Assad, like his father before him, regards his government as secular, in fact the power of the regime lies in maintaining a patchwork quilt of different religious faiths divided against each other. The army officer caste, like the Assad dynasty, is mainly Alawite.

As long as the army remains loyal to Assad then there will not be a successful overthrow of the Syrian regime. Every revolution poses the need to split the army, the repressive apparatus that acts as the last guarantor of the regime. Some soldiers, revolted by the brutality used against their own people, have deserted and begun armed struggle against Assad. Apart from hatred of the regime, they have no clear objectives. There is no reason for Marxists to support the opposition army, or the Islamist opposition.

At the beginning of 2012 protests against Assad spread to the two chief cities, Damascus and Haleb. Cracks in the army became more visible. This could represent the beginning of the endgame for Assad. The implications of his fall could be dramatic for the region. At this stage it is not clear what forces might emerge to take Assad’s place and what the implications would be for Syria and the region. First the repressive regime has at least kept the country together. After its demise at the hands of opponents with different aims, Syria could descend into chaos. Secondly Syria has a client regime in Lebanon, whose legitimacy would undoubtedly be called into question. Finally Syria is seen as an ally of Iran, whose regional power would therefore be weakened.

Iran

In Iran the lives of the vast majority are very difficult. Inflation is rampant, together with mass unemployment. The decision to withdraw food subsidies over time will make living standards even more parlous The ruling Mullahs are riven into factions and widely discredited. They shamelessly loot the state and industry. No nation on earth is less likely to rally to the banner of ‘revolutionary’ Islam than the Iranians! They know better. The revolution against the Mullahs will naturally be secular and progressive.

The imperialists are once again beating the drum about the need to intervene, militarily if need be, to prevent Iran developing the capability of using nuclear weapons. They have a problem. They lied to the world about ‘weapons of mass destruction’ before the invasion of Iraq and are understandably distrusted. How will they knit together the support to take on Iran, a much more difficult proposition? The excuse is that Iran is developing a nuclear capability. Israel already has a nuclear bomb and appears to be carrying out a programme of state sponsored assassinations of Iranian nuclear scientists. An outright invasion is almost certainly ruled out, though an airborne offensive, perhaps in conjunction with the Israelis, is a possibility.

Imperialism in the region

It is significant that Obama’s election has made no meaningful change to the predominantly hawkish posture of US foreign policy. His outlook seems to have been completely changed from gestures he made before election. He has been absorbed by the military-industrial complex.

It is true that imperialism has conquered Iraq and gained its main objective, the vast oil reserves of the country. But the invasion, apart from being bloody and brutal, showed the incompetence of the imperialist powers. They have left behind a monumental mess. The main beneficiary has been Iran, which now has a friendly Shiite government next door instead of Saddam Hussein. Likewise the long drawn out operation in Afghanistan is ending in failure and leaves chaos in its wake. The intervention of imperialism has actually served to destabilise the whole region.

In the years after the Second World War imperialism seemed absolutely dominant in the world. It is true that the USA often supported the anti-colonial movement. But it did so in order to turn the formal colonies of the declining European imperialist powers into virtual colonies of its own capitalist class. In one country after another the USA cynically led coups and deposed leaders they thought in any way unreliable. The first serious check to their ambitions was Vietnam. Now imperialism is incapable of dominating the world in a way that once seemed to be the natural order of things.

As we have seen, a year ago the Middle East appeared to be in a deep state of political slumber, exploited by imperialism and administered by tyrants. Now the region has been shaken and awakened. Now the process has begun, it cannot just be snuffed out. It will go on to its conclusion, transforming the Arab world in the process and challenging the domination of imperialism.

Even in Saudi Arabia, long regarded as a monolithically reactionary country, the King has been handing out money (of which he has plenty) to his subjects in order to buy support, or at least acquiescence. The Saudis are also doling out money to reactionary and obscurantist Muslim parties all over the region. In normal times money can oil the wheels of a political machine and make it work more effectively. It cannot stop a revolution. The King is uneasy in the face of the movements all over the region. This fact shows that all Arabs look to the Arab spring as a new beginning, either with hope or with foreboding. It is a clean break with the past. The present and the future are a period of awakening and transformation.

In the Middle East there remains the festering sore of the treatment of the Palestinians. Israel is the dominant military power in the region. None of the Arab states seem prepared to stand up against it. In the Occupied Territories the Israelis continue their relentless land grab, squeezing the Palestinian communities remorselessly. There is talk about peace talks once again in 2012. One thing is guaranteed. Peace talks will fail. There have been terms on the table since the Oslo Accords were signed in 1993. Even if some of the Palestinian leaders are browbeaten into signing a piece of paper, no deal can be made to stick. There is simply no basis for an agreement between lion and lamb.

Egypt the key

Many of the countries in the Middle East have been divided on the grounds of tribe, region or religion and ruled in that way. In some nations such as Libya the working class only consisted of a thin stratum of migrant workers in the oil industry and very little else. We cannot pin our hopes for world socialist revolution on countries like that. At best they may be incorporated into a bloc of nations that have overthrown capitalism, as Mongolia was a few years after the victory of the Russian Socialist Revolution in 1917.

We base ourselves on a classic movement of the working class. The country where that is most likely to happen is Egypt. All the objective conditions for such a mass movement exist. The workers have already shown tremendous militancy and courage in their struggles so far. What has not emerged yet is a mass party of the working class that could tap into the energy and initiative that the masses have already shown and direct it to revolutionary ends. It would be very difficult to construct such a party under conditions of illegality and repression of course. It is much easier now.

Egypt is important not only as the main focus for revolution in the Arab world. The movement there also can make links with revolutionary possibilities in Africa as a whole. The other two strategic countries on the continent with a mighty working class are Nigeria and South Africa. The South African working class overthrew apartheid with mass strikes. But capitalism remains. Inequality is entrenched, with a small minority of black politicos rising to share the obscene privileges of the white minority. Now we see the beginnings of a left opposition within the ruling African National Congress.

The whole of Egyptian society has been awakened and is buzzing with new ideas. People are contemplating a future that they at last can have a part in making. People are discussing all the time, and are receptive to new ideas now the stranglehold of Mubarak’s censorship and repression has been lifted.

The Bolsheviks, even when they were a minority in the working class movement as in February 1917, could tap into deep foundations of socialist consciousness among the workers. That sort of class consciousness does not yet exist among Egyptian workers. But at present we have precisely the conditions where that can quickly crystallise.

For all the reasons we have mentioned events in Egypt will be protracted. Tantawi and the generals are still firmly in power. Apart from their political rule they retain substantial economic power by owning big chunks of industry. Their strategy is to retain their real ascendancy behind the scenes while progressively abandoning their token positions as the provisional government preparing a long drawn out electoral process.

There has been no real change in the nature of the state. Mubarakism continues without Mubarak. The Supreme Council of the Armed Forces (SCAF) is using military courts against thousands of those who helped to make the Egyptian Revolution. It is slapping them in prison for years at a time. Their aim is to botch together a new constitution which, while offering a democratic facade, leaves their power intact behind the scenes. But the military are proceeding cautiously. It is inevitable after a long period of repression that democratic demands retain an enormous popularity with the common people.

Mobilised against the revolutionaries are the thugs of the old regime. Decades of repression have produced a layer of bribed gangsters loyal to the old order. Like any dictator, Mubarak maintained different paramilitary forces competing against each other in their brutality. They are almost certainly responsible for the attacks against the Coptic Christian minority and other attempts to divide and rule. This was all part of Mubarak’s strategy for survival. These forces do their work in the dark and out of uniform. They dare not take on the Tahrir Square protesters openly at this stage. They remain a threat to the revolution.

Millions of Egyptians know exactly what the military are up to. And they are resisting every step of the way. Further clashes are inevitable. Every time Tantawi and co. attempt a provocation they are met with determined resistance. At present we have a stand-off. It could last for some time. But it is an unstable equilibrium that must break up eventually. The generals do not need to plot an outright counter-revolution. They are already in the driving seat. However, now millions of Egyptians have been aroused, they cannot just be put back in a box. They want to taste the fruits of what democratic gains they have made so far. Further revolutionary movements of the masses are inevitable.

USA

In the USA the election of Obama appeared to open a window of change. Millions of Americans were enthused at his inauguration. He has not proved equal to their hopes. His health programme, the only significant reform of his four years in office, lags far behind the conditions working class people in other advanced capitalist countries take for granted. Obama also attempted a Keynesian programme to stimulate the economy on election in 2009. It didn’t work. He tried to spend federal government money on infrastructure projects to give people jobs and get the economy moving. As fast as he injected money into the economy, the State and local administrations were laying workers off in order to balance their budgets.

Since then the Democrats have lost their majority in Congress. Obama has abandoned even trying to improve the economic situation. Guantanamo is still there. The USA still stands convicted of torture. Obama’s record is miserable. He has proved to be a massive disappointment to his supporters. More importantly the failures of his policies has forcefully rammed home into the consciousness of the working class the fact that America is dominated by two bourgeois parties run by and on behalf of millionaires – the Republicans and Obama’s Democrats.

Will Obama be re-elected? It is impossible to answer that question at this early stage of the campaign. It is not really the most important question in US politics for Marxists today in any case. Obama’s re-election depends to a large extent on the state of the economy. Officially 9% are jobless in the USA. Really the figures are much higher. Taking into account the ‘discouraged’ (those who have given up looking for employment) and those scraping by on part time jobs probably one in six Americans are out of work.

Though the US economy seems to be picking up slightly (at least in comparison to the Eurozone) growth is not rapid enough to make a significant dent in unemployment. Obama may well be judged on the state of the economy and found wanting. But an upturn could give voters hope for the future, lift Obama’s chances and, more importantly, strengthen the hand of the working class. A crisis in the European Union, though, could push the entire world economy, including the USA, back into recession.

Obama appears to be positioning himself in the middle of the political spectrum, in effect as a moderate Republican President. He retains the belief of so many other centrist politicians that his natural supporters have no alternative but to vote for him on the day, because the alternative would be worse.

But he is killing hope in the hearts of all those who rallied to his support in 2008 in a campaign for change. This is an inevitable process in American politics. Until the working class understands that neither the Republican nor the Democratic Party will do a job for them, we will not see a real force for socialist change emerging in the USA.

That means in the first instance a movement for a Labour Party based on the trade unions. Movements in the 1990s to found a Labour Party ran into the ground. The main reason for this was and is the determination of the trade union leaders to adhere to the Democrats. Flag waving for Obama’s election may have seemed realistic in 2008. It will not arouse the same enthusiasm this year.

The election of Republican administrations at State level has led to a war on the unions. In Wisconsin Governor Scott Walker has moved to eliminate public sector trade union collective bargaining. His lead is being followed in several other Republican-controlled States. At present the jobs of hundreds of thousands of US postal workers are also under threat.

On the other hand the unions won a great victory in Ohio over the right wing Republicans. In a referendum Ohioans voted overwhelmingly against a proposal to ban public sector strikes and shred bargaining rights. This shows how public opinion can be mobilised behind the cause of labour. The working class in the USA has shown the determination to fight. The main obstacle to victory, as elsewhere, has been their own union leadership.

The trade unions have been severely weakened over decades by anti-union laws and by companies breaking away to relocate in the non-union South. Organised labour’s main strength now remains in the public sector. The recession conditions have weakened the position of the unions further. Their leaderships have offered concession, such as give-back contracts, acceptance of forced wage cuts and part time working or lay-offs, all to no avail.

Conditions and consciousness

There is a myth that Marxists believe that mass unemployment automatically radicalises workers. Actually it can bring disorientation and despair for a time. It can also produce anger and questioning. Obviously American workers are bitterly aware of the unfairness of their situation. While they suffer, the rich get richer. But their bargaining power, their ability to do anything to improve their conditions, is weak when there are millions of unemployed desperate to get jobs.

Likewise in the period 1929-33, in the depths of the Great Depression, there were very few strikes. It was when the jobs market was picking up in 1934, while there was still widespread unemployment, that we saw a general strike in San Francisco, the teamsters’ rebellion in Minneapolis and the Auto-Lite strike in Toledo. The big battles in the car industry and steel took place in the late 1930s when organised labour felt stronger. The links between conditions and consciousness are complex. They depend in part on the preceding course of the class struggle

World economy

Political perspectives are dominated by economic conditions. Conditions for workers in most capitalist conditions are likely to remain gloomy, particularly in North America, Europe and Japan, the traditional heartlands of capitalism. We are living through the most serious crisis of capitalism since the Second World War. The banking crisis, the crisis of state finance, the sovereign debt crisis and the crisis of the Euro are successive forms of appearance of that capitalist crisis. No end to the hardships is in sight. We are entering an age of austerity.

The Euro crisis

The economic gloom may well deepen on account of the Euro crisis. There is talk of a ‘double dip’ recession or at least a second phase to the current malaise. It is important to recognise that the crisis of the Euro is not a technical problem to be fixed (or not) by economic ‘experts’. It is part of the crisis of capitalism that broke out in 2007 in the form of the ‘credit crunch’. Credit dried up after the excesses of consumer borrowing and the house price bubble of the early years of the new millennium. Governments all over the world responded to what was regarded as a banking crisis by intervening to bail out the banks and bail out capitalism.

Not only did these governments spend vast amounts of taxpayers’ money to bail out the banks; they also lost tax revenues and had to spend more on doles and benefits as a direct result of the recession. In consequence the crisis then manifested itself as a crisis of state finance. The government was spending more than it was getting in. Debts and deficits spiralled out of control.

In the case of poor and peripheral countries most of this government debt was ratcheted up abroad. So the fiscal crisis of the state became a sovereign debt crisis for countries such as Greece. Within the Eurozone it put huge pressure on the Euro by way of its weakest members. If they cannot pay their debts how can they stay in the Eurozone?

A fixed exchange rate regime such as the Euro puts additional strains on the peripheral members of the currency union. A country with a balance of trade deficit does not have the option to devalue. Devaluation makes the local currency cheaper in world money markets. In doing so it makes exports cheaper in overseas markets and imports are more expensive. Devaluation is not a long term solution in any case, as it does not solve the fundamental problem of lack of competitiveness. All it can offer an uncompetitive country is temporary relief in a crisis.

Greece and the Euro

Greek workers are paid much less than German workers. Yet Greek industry is not competitive with German industry. Germany exports to Greece, but Greece exports little to Germany. The reason is that Greek workers are less productive, so the labour cost per unit of output (called Relative Unit Labour Costs) is much higher in Greece, though the workers’ hourly rates are so much lower. This is not the workers’ fault, of course. They are less productive because the Greek capitalists haven’t invested.

Greece has debts, mainly with the banks of other Eurozone countries such as France and Germany. It cannot possibly pay these debts and interest payments keep mounting up. These payments are sucking the life out of the Greek people. The whole country is likely to be pushed down a deep hole of third world debt from which it will be practically impossible to emerge, as we showed was the case in Egypt earlier.

Greece is in the forefront of the crisis. Other countries – Portugal, Ireland, Italy, Spain and even France are under the same pressures. The crisis of the Euro has thrust the Greek people into the front ranks of the battle. Greece is one of the most-crisis ridden countries in the world, and one where the most immediate revolutionary opportunities are likely to arise.

The European authorities don’t care about the fate of the Greek people. But Sarkozy and Merkel do care about the fate of French and German banks. Greece cannot pay its debts. If the country defaults, a swathe of West European banks will collapse. As we saw in 2008, the banks all over the world are interlinked and lined up like dominos. If one goes down they can all go down.

The future of the Eurozone

The other problem causing the crisis is the faulty architecture of the Euro. It is a currency without a country. Whereas the British state will defend the pound sterling as the French used to defend the franc, there is no nation state prepared to defend the Euro. What is required is a united policy to face off the speculators. This need is negated by the shortsighted selfishness of the nation states in the Eurozone. They are not prepared to risk their own money for a cause they do not see as their own. There have been ten European Union (EU) summits to deal with the Euro crisis so far, as of the end of 2011. They have all failed.

The fundamental contradictions of capitalism are between the development of the powers of production and the limits imposed on them by private property in the means of production and the nation state. The growth of the productive forces has actually made tiny nation states like Belgium almost irrelevant. Europe needs a huge common internal market to further develop production, and at some stage that necessitates a common currency. Yet politicians of squabbling states within Europe fight for their own national interests, and not the common interests of the Eurozone. As a result the entire Euro ‘project’ could be rolled back and shipwrecked, with incalculable damage to the rest of the world economy.

Will the Eurozone break up? Will countries such as Greece be forced to leave? The Euro crisis is the main threat to world economic recovery over the next two or three years. The European powers have invested a lot in the existence of the common currency. They will not lightly give it up. On balance the Euro should survive. That means that the world economy will continue to recover, though painfully slowly. If there is another deep recession in a few years’ time, that could sink the project for good.

The breakup of the Euro could take the form of Germany and other net exporting nations such as Holland setting up a strong common currency and leaving the rest to their fate. Or it could be caused by the expulsion from the Eurozone of Greece and other nations incurably in debt, whose membership would be perceived to threaten the future of the European Union as a functioning capitalist club.

The Euro and the world economy

In fact the prospect of another deep recession soon is a very real one. It is dangerous to make analogies with previous periods. Every historical period has unique features. All the same there are similarities with the 1970s and 1980s, a crisis-ridden time for world capitalism. The recession in 1973-4 was followed by another in 1980-2. This period was one of revolutionary convulsions, where the fate of the capitalist system lay in the balance.

The Euro crisis could trigger a new recession, which would spread far beyond the European Union. The world economy has been tremendously weakened by the most serious crisis since the Second World War. A return to recession conditions could produce political as well as economic turmoil all over the globe.

Greek default

Greece cannot possibly pay its debts. The country will be forced to default, no doubt about it. The deal signed in 2011 already imposed a ‘haircut’ (an enforced partial write down of debt) upon owners of Greek government debt. But of course it was nowhere near enough. The pressures being imposed on the country and its people are unbearable. The leading powers within the EU will at some stage try to organise an orderly, conciliatory default as a damage limitation exercise, writing off some of the debt. It would be an attempt to preserve the Euro. The survival of the Euro rests on a knife edge.

Marxists would not advocate that Greece or any other country should just leave the Euro. If Greece were to leave and reinstate its old national currency it is reckoned that the Drachma would fall to half the value of the Euro, if not lower. The country would be able to sell its exports at half their present price, so that should improve Greece’s balance of trade. The bad news is that creditor banks in the EU would insist that debts contracted in Euros should be paid in Euros, so Greece would have to repay twice as many Drachmas as they would Euros.

Marxists do advocate that a workers’ government in Greece should repudiate the monstrous debts. That could lead to expulsion from the Euro, but the initiative and fault for the breach would be seen to lie with capitalist Europe.

A unilateral, disorderly default by Greece or any other country could lead to a banking collapse and the break-up of the Eurozone. The break up could even occur as the result of a political misjudgement. The situation is not completely under the control of the EU authorities. Speculative sharks are circling.

We have already seen that the EU leaders are under pressure from the voters in their home countries to fight for their national interests rather than the wider interest of the European Union. That is why the decision makers are dithering and unable to reach agreement. The apparent paralysis of the decision-making process at the top of the EU has reduced US President Obama to wringing his hands. The breakup of the Euro would be a catastrophic event for the entire world economy.

World economic leadership

It is clear that the imperialist heartlands remain the key to the future of world capitalism. There was fashionable talk of China and other countries decoupling from the USA, in the sense that they could separate themselves from the gravitational pull of the world’s biggest economy upon the global economy as a whole. This was disproved in the course of the Great Recession. It is clear that the USA, though weakened and under challenge from China in particular, remains the hegemonic power responsible for almost a quarter of world output. China is now a bigger exporter of manufactured goods than the USA, but its economy produces only about 8% of world output. The USA remains the world’s only superpower with the demise of the Soviet Union. It is undoubtedly in decline compared with its peak in 1945, but is unlikely to be challenged as hegemonic power for decades. Shanghai is growing as a financial centre. As yet the Chinese currency is not fully convertible. It cannot therefore become the global hegemon as Britain was with the pound sterling and the USA is with the dollar. For that the Renminbi must become the main reserve currency of world trade and China develop a city as the world’s financial centre.

It should be recognised that global hegemony is not just achieved by one country outpacing another for a number of years. The dominant power builds up the institutions and culture of global leadership gradually, and they only disappear slowly when under challenge. Britain was probably losing the economic race to Germany and the USA by the 1880s. But the City of London had built up its power as centre of the global capital market over centuries and retained a monopoly over financial expertise for a long time afterwards. America was unable to challenge this position till the First World War turned Britain from a creditor to a debtor country. Even then US hegemony did not become apparent till 1945.

After the Second World War the USA was able to dictate the terms on which world trade was conducted. The basic rules of world trade, the formation of the International Monetary Fund and World Bank and the imposition of the dollar as the world reserve currency which was ‘as good as gold’ were all part of this post-War settlement.

There are advantages to the stability achieved by allowing one hegemonic power to set the rules of the game. The inter-War period was chaotic because Britain was unable to take the lead in international relations and the USA was unwilling to do so. Since world trade became dominated by capitalism Holland, Britain and the USA have acted as hegemonic powers. The only possible challenger in the future is China, but that is some way off.

Emerging economies

It is true that economic perspectives are more nuanced than the future facing the advanced capitalist countries painted above. The BRICs (Brazil, Russia India and China) are growing fast, all showing countries such as the USA a clean pair of heels. Uneven development is after all a permanent feature of historical progress, and of capitalist accumulation in particular. It should be emphasised that many less developed countries remain enmired in the grip of imperialism. Billions of people living under capitalism are still trapped in deep, apparently inescapable poverty.

Though the BRICS are all growing at present, they are all growing for different reasons. Brazil and Russia both act principally as suppliers of raw materials to the industrialised world. Brazil will be discussed briefly in the section on Latin America. India will be discussed in more detail later.

Russia in particular is almost exclusively dependent on exports of oil and natural gas. The price of these staples is notoriously volatile on world markets. It should not be forgotten that the collapse of the Soviet Union and the restoration of capitalism in Russia produced the biggest collapse in production of the twentieth century, greater than in the Great Depression. That puts the present growth rate in context. The means of production were seized by greedy oligarchs, for the most part former Stalinist managers. The gangster capitalism that resulted does not benefit the common people whether in boom or recession. Now we see the first stirrings of opposition to Putin’s authoritarian rule.

China

China remains a deformed workers’ state. Its growth rate has been the highest in the world for more than thirty years. From 2007 to 2011 the advanced capitalist countries have rolled back. In the same period China grew by more than 42%.

This explosive growth has lifted more than 400 million Chinese out of poverty. The fact is that China is developing the productive forces faster than capitalism can because the commanding heights of the economy are publicly owned, because the economy is planned and because it has broken with capitalism. This should be an inspiration to the wretched of the earth, despite the oppression of the masses by the ruling bureaucracy represented by the Chinese Communist Party. As long as the productive forces continue to develop, and workers and peasants get some of the benefits, then the regime is likely to survive despite tens of thousands of rebellions that we know are taking place against injustices by local functionaries.

Because of the sheer size and gravitational pull of China, which is a densely populated country with access to few natural resources, trade with China has provided a fillip for countries in the Far East and as far away as Africa. Part of the current prosperity of countries like Indonesia is attributable to the fact that they act as raw material suppliers (mainly coal and palm oil in Indonesia’s case) to the Chinese economy.

China is at the hub of a complex division of labour. The way in which the growth of the Chinese economy has buoyed up the whole East Asian region and further afield may be illustrated by the example of the iPhone. This was designed by Apple in California. The components are manufactured in Japan, South Korea, Germany and the USA. In fact Japan probably produces most of the high tech bits. The iPhone is then assembled at the Taiwanese owned Foxconn factory in Shenzen, which employs an incredible 3-400,000 workers.

India

China’s present rapid industrialisation was prepared by the 1949 Revolution which led to the abolition of landlordism and capitalism. By contrast India has seen no thoroughgoing land reform since independence.

Evidence of this failing is provided by the Naxalite rising, where landless peasants armed with bows and arrows fight medieval style landlords. The Naxalite insurrection has dragged on for thirty years and claimed thousands of lives. There is no prospect that the Maoist guerrillas will overthrow Indian capitalism, but the rebellion is likely to remain a thorn in the side of the state for years to come. Its main significance is to challenge the view that India is modernising and adapting to the requirements of global capitalism. Though that may be the government’s intention, the situation in the countryside reveals the backwardness, lack of infrastructure and other obstacles to capitalist modernisation that still exist. Pockets of extreme poverty and backwardness still exist in the Chinese countryside, of course. They have been gobbled up by the rapid industrialisation that has offered the opportunity of a new and better life to hundreds of millions of Chinese peasants.

Of far more significance to the workers’ movement internationally than the ongoing Naxalite insurgency is the loss of power in elections last year by the Communist Party of India (Marxist) in West Bengal last year. The CPI (M) has for 34 years regarded the province as its fief via the United Front government. Since the 2011 elections a vicious right wing administration has run West Bengal. There has been a wave of repression, according to the CPI (M). The victory of the right can be seen as a serious defeat for the workers’ movement. All the same the Party still claims hundreds of thousands of members nationally. It is bound to be in crisis. The traditional Stalinist parties have not represented and defended the interests of the working class. They have shown themselves to be irrelevant and are in danger of becoming marginalised.

These recent defeats of the working class have produced a trumpeting of capitalist triumphalism and talk of a new paradigm in India. This is completely premature. An objective balance sheet reveals the failure of capitalism in India. Though Indian growth has been high over the past decade, it is due to slow down sharply in 2012. There are structural reasons why India will not achieve the consistently fast growth rates needed to catch up with China.

More than half the population is still dependent on farming and the land for work. Agricultural productivity is very low. Peasants labour on dwarf plots, incapable of taking advantage of new techniques. That would need bigger fields and organised co-operation among the peasantry to implement effectively. Seldom are the peasants outright owners. As sharecroppers they have to give up the fruits of much of their labour to an idle landlord class. They are often squeezed by moneylenders as well, and by the suppliers of inputs such as fertilisers. The villages can be very isolated. A majority of the population, 600m Indians, have no access to mains electricity. Thoroughgoing land reform and a helping hand from a workers’ state in command in the cities is an absolute precondition for modernisation and the elimination of rural poverty in India.

The picture of Indian industrialisation has been compared by economists to the construction of cathedrals in the desert. There are undoubted patches of modernity. The prevailing backwardness in the countryside means that the islands of prosperity cannot percolate out to the rest of the nation.

There is a significant layer of educated English-speaking young people who are being snapped up into performing outsourced business services – accountancy, routine legal services such as conveyancing and the like, and staffing call centres to serve the imperialist countries. It is impossible that these activities can provide employment and a way forward for a country of more than a billion people. Indian manufacturing is still protected. It serves a big home market but is not generally competitive globally. It is hampered by poor infrastructure.

There has been a big campaign against corruption led by Hazare. It is serving to discredit the entire ruling elite. No wonder. Corruption is indeed a major ‘burden on business’ in India. The Swiss Banking Association calculated that in 2006 thirteen times as much as the total official external debt of India was salted away in Swiss bank accounts by Indian citizens. The total was an eye-watering $1,456bn.

The world’s workers’ parties

Social democracy

Many of the traditional social democratic parties date back to the foundation of the Second International in 1889. They are the oldest mass workers’ parties in the world. In their early years they were a significant if not dominant force in the foundations of the labour movement and its battle for democracy and reforms. Over time they developed an encrusted reformist bureaucracy. The social democracy was irretrievably split by the attitude of the leadership to the First World War and the Russian Revolution.

For decades after the social democracy remained the main party of the working class in the majority of advanced capitalist countries. During the period of the boom after the Second World War, when capitalism was growing rapidly, they were able to maintain their credibility by gaining important concessions for the workers. The British Labour government of 1945-51, for instance, won a National Health Service and a welfare state. As the post-War boom drew to a close, reforms were more difficult to achieve. Eventually important layers of the leadership were captured after 1989 by the feeling that there was no alternative to capitalism, and total free market capitalism at that. They progressively adopted the dominant neoliberal ideology. The British Labour government of 1997-2010, despite being elected by a landslide, introduced very few reforms in their period of office. They got away with it because, for most of this period, capitalism was in boom and living standards were rising for the majority of workers. But the traditional mass parties emptied out of members. This pattern was repeated in one country after another. The British Labour Party was finally ejected from office after the Great Recession struck.

Stalinism

The Stalinist parties were formed in the wake of the Russian Revolution of 1917. In the beginning they composed the revolutionary part of the working class. In several countries they replaced the social democracy as the mass party of the workers; in others the labour movement was split between social democracy and communism.

The communist parties did not remain genuinely revolutionary parties for long, With the bureaucratic degeneration of the Soviet Union under Stalin, the Communist International became over time a mere instrument of Russian foreign policy. It was still more attractive to revolutionary-minded workers than the social democracy. The Trotskyists were isolated and persecuted in the Soviet Union as the bureaucracy strengthened its grip on power. Trotsky tried to rally the revolutionaries around the world against the counter-revolutionary forces of social democracy and Stalinism. His efforts were stillborn. After the Second World War the reformists gained in support on account of the post-War boom. The influence of the Stalinists in the movement grew because of the accession of a whole layer of new Stalinist states.

The Stalinist parties played a leading and heroic role in the struggle for national liberation in many countries. (The Communist Party of India’s reputation was scarred by its subservience to Moscow.) The victory of the Chinese Revolution in 1949 gave another boost to the prestige of international Stalinism. The ‘communist’ parties became a more important part of the labour movement globally than the social democracy.

The Sino-Soviet split in its turn produced new splits in the workers’ movement. This split was not as clear cut as the choice between reformism and revolution offered after the Russian Revolution. Initially Maoism appeared to offer a left alternative to traditional Stalinism to some militants. In advanced capitalist countries with a mass working class, guerillaism could not act as a model or a viable strategy. Mao used the Chinese-oriented parties as foreign policy instruments in the same way as Stalin had. In some areas the Maoists became independent of Chinese Stalinism, particularly after the death of Mao. The tendency of these parties was to drift towards reformism or to become rural guerrilla movements.

Capitalism v socialism

The credibility of Stalinism received a huge blow with the collapse of the Soviet Union and its satellite states in Eastern Europe in 1989. Not only did the restoration of capitalism impoverish, disorient and demoralise the working class in these countries. It also created a wave of capitalist triumphalism, a feeling that capitalism was the only game in town. The communist parties in capitalist countries received a blow from which few of them recovered. This collapse also shook the social democratic parties, which generally moved to the right, and created a feeling of helplessness more widely in the world labour movement.

After the collapse of the Soviet Union and the Eastern bloc in 1989 there was a wave of capitalist triumphalism. ‘Socialism had failed’, we were told. One writer, Francis Fukuyama, even proclaimed ‘the end of history’. Corresponding to this triumphalism the ideology of neoliberalism became dominant. Any state interventions in the economy however moderate, any reforms or improvements in the conditions of the working class, were declared to be an obstacle to the development of unfettered market forces. Workers were supposed to just put up with the ever-increasing demands of the bosses.

Marxists recognised that the collapse of Russian Stalinism, actually a miserable caricature of real socialism, was widely seen as a serious setback by working people all over the capitalist world. Was there really no alternative to capitalism? But we also knew that the working class was bound to struggle, and that the advanced elements would inevitably come to recognise that the successful outcome of their struggles must be the overthrow of the capitalist class and the installation of a society in the interests – socialism.

Latin America

Venezuela

This new socialist ideology, cleansed of the impurities of Stalinism but inevitably unclear as to its ultimate goal and the methods of the struggle that has to be waged, arose first in Latin America. Its first significant representative was Hugo Chavez in Venezuela. He calls it Bolivarian socialism, named after the anti-imperialist Latin American independence leader.

Latin America had experienced a ‘lost decade’ in the 1980s. As living standards were rolled back to pay the exactions of Western banks, capitalism resorted to dictatorial rule in large parts of the continent. Now the dictators have been ousted. The masses have reclaimed their democratic rights. Over the past decade they have been moving forward in one country after another.

President Chavez faces a serious electoral challenge in Venezuela over the coming year. Chavez has enormous reserves of support among the workers and the poor. But he has to continually mobilise and motivate this support against the threat of counter-revolution. Chavez is seen as a consistent anti-imperialist and a potential threat to capitalism. He has not capitulated to the pressures on would-be reformist leaders. As such he is the subject of constant intrigues and coup attempts both from the capitalist class at home and from US imperialism.

Venezuela is a major oil exporter. For this reason Chavez has a constant supply of funds with which he can implement reforms and inspire his supporters among the poor in the process. But Venezuela remains a capitalist country. Chavez has not moved to expropriate the capitalist class. He is a champion of the poor, but relies on his own charisma to draw support towards him when he is under threat rather than building a mass party in the country.

An unintended consequence of the phenomenon of Chavezism is that we have not seen the trade unions emerge as an independent factor in Venezuelan politics. The new trade unions are rather part of the Bolivarian movement in support of Chavez. It is of course correct that labour should support him against counter-revolutionary attempts, but the working class has its own interests and should maintain an independent position.

So we have an unstable equilibrium in Venezuela. How long can this go on? The situation has already lasted more than ten years. It could carry on for years longer. Chavez has not abolished capitalism and introduced a planned economy. Therefore the country, and his supporters in particular, are plagued with inflation. Most food is imported and rising food prices are often accompanied with outright shortages of basic foodstuffs such as milk. The Venezuelan capitalist class are not reconciled to his rule and constantly seek to provoke counter-revolution. On the other hand, as long as the oil revenues keep rolling in, Chavez can keep his supporters fairly happy and maintain the misiones which provide the basis of his support at a local level.

Bolivia

Venezuela’s example was followed by the election of Evo Morales in Bolivia as President. Bolivia is a desperately poor country with vast reserves of natural gas, which could make the country and its people wealthy. Morales was elected on the back of a revolutionary wave. He was the first indigenous person to be elected President. The elite in Bolivia are descendants of the Spanish conquistadores. At first Morales took radical-sounding action against foreign owned energy companies that delighted his poor and indigenous supporters. Bolivia joined ALBA, the trade pact set up by Chavez which is deliberately intended to challenge US control of the continent’s economies. ALBA has provided vital support for Cuba, caught in the vice of America’s vicious fifty year old blockade.

More recently Morales has shown signs of wavering. He is under enormous pressure from the capitalist class internationally. Will Morales go further in Bolivia? At bottom he is caught in the same dilemma as Chavez. Unless he moves to expropriate capitalism he will not be able to carry out his reform programme.

Brazil

Brazil is a giant in Latin America. With a population of almost 200 million, the economy overtook Britain’s in size at the end of 2011. Despite a long history of vicious military dictatorships the sheer abundance of natural resources and wealth of the country mean that the situation need not be as desperate for the workers and peasants as in the rest of Latin America. The transition to a democracy, where the workers at least appear to have a say in the way the country is run, was cemented by the election of Lula as president in 2002. Lula was a former steelworkers and radical. His party is called the Workers’ Party (PT). He has recently been succeeded as President by Dilma Rousseff, also of the PT. Lula and his successor have so far been able to use the recent rapid growth of the economy in recent years to improve the living standards of the majority of Brazilians without challenging capitalism. Lula has been lucky. Under the patina of temporary prosperity he has maintained his popularity among all classes, but he has solved none of the deep, ineradicable problems of Brazilian capitalism. The PT has used the advantage of an economic boom to follow a radically different path from that forced on Chavez and other populist Latin American leaders. This cannot last!

The future

Coming elections

The elections in Spain in November 2011 provide a typical pattern of the likely shape of things to come. The Spanish Socialist party (PSOE) was thrown out of office. The government was being punished for the bad economic climate. Youth unemployment in Spain is an incredible 46%. For some years the ruling Socialists made some effort to ameliorate the worst effects of the global recession on the population. In the end they capitulated completely to the demands of international markets and imposed ferocious cuts. For this they were rewarded with eviction from office. They had sided with capital against their own natural supporters and paid the price. Everybody knew that the right wing PP would enthusiastically introduce even more severe economies, as they are now doing. There was a substantial level of abstentions in the elections, reflecting dissatisfaction with the political process and disgust with the establishment parties.

The Spanish elections look like a movement to the right. Actually they show something different. Incumbents are unpopular because they are taking the blame for the austerity. They are being turfed out all over the world. Opinion polls indicate that right wing Sarkozy will lose the French Presidential elections in May.

Whichever party is in office, world capitalism is in power and conditions are bad for the workers. The capitalists demand that governments implement austerity upon their electorate.

A sinister recent development is the formation of technocratic governments in Greece and Italy. Elected governments have been thrust aside, using the excuse of the national emergency, in favour of bankers and other ‘experts’ It is assumed that ‘the markets’ (capitalism) will trust the technocrats to do the right thing for them in exercising the reins of power. Usually bourgeois democracy allows the capitalists to sort out differences between themselves and debate strategy, as well as providing the mass of the people with the illusion that they also have a say in how society is run. It is surely an indication of the depth of the crisis that the usual institutions of capitalist democracy will not let international capital take the drastic measures that it deems necessary.

So democracy has been thrust aside for the time being. The political regime in Greece and Italy is similar to the years before the downfall of the German Weimar Republic when Hitler took power in 1933. Because of the desperate economic situation and political and parliamentary deadlock, what Trotsky called weak forms of Bonapartism ruled Germany. On account of the impasse between the classes and the depths of the crisis, the state gained a certain independence from society. It acted in the interests of capitalism but without the authorisation of the capitalists. Bruning, Schleicher and Von Papen all ran the country on classic conservative economic principles without a democratic mandate.

Of course the rise of a mass fascist party like Hitler’s is now ruled out. The balance of forces globally has changed in favour of the working class. The mass of frenzied petty bourgeois and complacent peasants in the countryside that provided the basis for Hitler’s support have for the most part been gobbled up by capitalist progress.

Greece – on the verge of meltdown?

The impossible situation that the Greek people find themselves in, up to their ears in debt they cannot possibly pay, could bring down the Euro. The European Central Bank and International Monetary Fund are concerned with the threat of contagion. If Greece is let off the hook only a little bit, then Ireland, Portugal and all the other debtor countries will be queuing up for equal treatment. If Greece collapses, that could be the start of a chain reaction that could drag the world economy right to the brink of meltdown as it was in September 2008. Commentators are starting to whisper about ‘a Lehman moment’ that signalled the near-collapse of world banking in that month.

Despite all the top US bankers and the Treasury Secretary being closeted away for an entire weekend in September 2008, no agreement to save the stricken Lehman Brothers bank could be arrived at. Whatever the reason, this failure is now seen as catastrophic – leading to the collapse of all the subsequent financial dominos. Greece could be the equivalent of Lehman Brothers in the sovereign debt crisis. Its default could bring down the Euro.

The Greek government debt and deficit were higher in 2011 than they had been a year earlier. It was quite clear by now that the Greek economy was in a vicious circle, where cuts fed economic decline and further decline necessitated yet more cuts. The Greek economy was in effect going on a diet by slicing off limbs in order to lose weight.

One reason for the deteriorating economic situation was that much of this enforced austerity didn’t even go to pay off the country’s monster debts. Servicing the debt will cost 12% of GDP, vastly more than health and education. All this money will be syphoned off just to pay interest on the existing debt, not even to reduce the principal. Most of this money is drained out of the country.

At the end of 2011 holders of Greek government securities were making higher returns than they would do even on the stock exchange. At that time the return on ten year Greek bonds stands at 35%. The speculators claim this exorbitant sum is compensation for the risk they are taking. In fact, if Greece is unable to pay, they will scream for their national governments to bail them out, as they did in 2008.

The Greek working class has embarked on more than a dozen general strikes since the crisis began. They have resisted the cuts with every fibre of their being. All this shows is that one-day and two-day general strikes may shake capitalism. They cannot overthrow it. They can be used to prepare the workers for further action. The course must be set for social revolution.

The PASOK (Pan-Hellenic Socialist Party) government has unfailingly carried out the demands of the EU authorities and imposed austerity upon austerity on the common people. Now they have been supplanted by a ‘technocratic’ (unelected) administration to do the dirty work. What has all this austerity achieved? In 2012 the Greek economy is predicted to shrink by another 5%. How can this sacrifice help to pay off the debts?

The problem faced by the Greek working class is one common to workers all over the world. It is a problem of leadership. The social democratic party PASOK was so eager for the fruits of office that it kicked its supporters in the teeth and launched round after round of austerity. Their trade union arm, PASKE, is in revolt. The Greek Communist Party (KKE) is an unreformed Stalinist party incapable of putting forward a programme to inspire the working class. Recently they have decided that Stalin’s Moscow Trials of the late 1930s, that framed Zinoviev, Kamenev, Bukharin and a whole generation of old Bolsheviks and put them to death, were completely correct! Their trade union arm, PAME, always marches separately from the rest of the working class on demonstrations against the cuts. They are incapable of leading the working class out of the desperate situation it finds itself in.

Resistance

Though Greece may be regarded as being in the forefront of the struggle at present, we see the beginnings of a general movement in resistance. In Italy and other countries where the cuts are beginning to bite we have seen mass strikes in opposition. Since the onslaught on the working class is global, so is the opposition. Most countries have seen big demonstrations and movements of the working class.

In tandem with this we have also experienced a mass wave of student protest in one country after another. Though the issues are different in different places, there is a common thread. Capitalism has educated millions of people all over the world but, from Cairo to Barcelona, it can now offer them no future. Mass youth unemployment is a common feature of the new world of austerity.

The obscenity of bankers paying themselves huge bonuses, when arguably they were responsible for causing the world economy to crash, has caused almost universal indignation. In many countries we have seen direct action and protests. The Occupy Wall Street (OSW) movement, no doubt inspired by the assemblies in Tahrir Square, proclaims, ‘We are the 99%’. Though only a minority of activists are actually camping in protest, the movement is receiving a generally sympathetic response. Trade unions have marched in their support in the USA. OSW, and the kindred protests all over the capitalist world, is of enormous symptomatic significance.

Finally Marx mentioned in Capital Volume III that the accumulation of capital not only lays waste and ruins labour power, and thus human beings. It also exhausts the soil and the planet. Since Marx’s time environmental degradation is far advanced. This is not a news item we can just comment upon and then move on to next business. Imperialism’s search for loot, specially oil, seems never ending. We have seen wars about water in Africa between herders and agriculturalists. Drought is a man made condition. On the other hand Bangladesh is threatened by flooding. Large parts of the country could be under water in a few years time on account of rising seas caused by climate change fed by human action. The destruction of the environment is probably the most serious and longstanding threat that capitalism poses to the continued existence of the earth as the home of mankind. Environmental protection must be a central part of the programme of the working class in its struggle against the system.

The working class is waking up. There is a real anger and a determination to fight. This represents the early stages of a huge movement against capitalism. So far that has not been articulated in the mass organisations. That is bound to come.

Categories: China Observation, Economy Tags: ,
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