Crisis in the : Between and De- fault

Sin´ead Kennedy

we are “witnessing a turning point of sig- nificance”1.

Global Dimensions Despite some of the more optimistic eco- nomic commentators predicting a slow end to the recession and a return to economic growth, the state of the global economy remains precarious. The pages of the fi- nancial press are littered not with opti- mistic cries of recovery, but rather with Exactly five years ago the French bank loud sighs of relief that the economy has BNP suspended its sub-prime mortgage not nose-dived into another recession. Last funds in the US because of “an evapora- year it appeared that economic growth had tion of liquidity”. The greatest economic returned to the global economy but this crisis since the 1930s had begun, leading year that growth has, once again, stalled. to the Great Recession of 2008-9 and now The Financial Times reported in June the Long Depression. The crisis has been that “the engines of world growth are run- a defining event for Europe: it has forced ning out of steam while the trailing wag- through geopolitical change by turning the ons are going off the rails”2. The lat- Eurozone into a Germany-led project and est World Economic Output (April 2012) it has created enormous social change in an annual report produced by the Inter- favour of capital and against labour. But, national Monetary Fund (IMF), suggests it has also exposed the beast and given that the prospects of global recovery are, lie to the European ideals of partnership, at best, fragile with debt levels remaining equality and social justice. However, while dangerously high: it is still too early to accurately predict how the current crisis will play out, what Despite substantial fiscal con- looks increasingly certain is that it will solidation efforts, cyclically ad- leave behind at least one casualty: the justed deficits continue to be so-called “European Project” of European elevated in many advanced and integration the core of which is the . some emerging economies, and Considering, as Stathis Kouvelakis argues, in the short run debt ratios are that this project has been the only one of still rising in many cases. Al- any real importance, consciously designed though conditions are in place by the ruling class, it becomes clear that for a stabilization of debt ratios 1Stathis Kouvelakis, “Introduction: The End of Europeanism” in Costas Lapavitsas et al., Crisis in Eurozone. London: Verso, 2012. 2Chris Giles, “Global Recovery Has Stalled Again”, Financial Times (17 June 2012), www.ft.com/ cms/s/0/fb7b2ab8-b882-11e1-a2d6-00144feabdc0.html

3 in many advanced economies of global GDP”6. Despite these unprece- over the next few years, in dented levels of investment the IMF esti- some cases countries have lit- mates that the major US and European tle margin for error in fiscal out banks are carrying $2.8 trillion worth of turns or little space in current losses, and have yet to own up to $1.5 tril- policies to absorb growth or in- lion of this total7. The eurozone banking terest rate shocks without the system continues to remain heavily depen- debt ratio’s continuing to rise dent on aid from European Central Bank ... Overall, risks in this area (ECB) with the Bank committing a further remain broadly unchanged3. billion in January of this year. What the crisis has revealed is the Alex Callinicos has argued that the underlying contradictions of capitalism; world economy remains heavily depen- above all the long-term crisis of profitabil- dent on state action; not in the shape ity that has gripped advanced economies of fiscal stimuli but in the form of ul- since the late 1960s. Increasingly the lead- tra cheap money policies pursued by lead- ing capitalist states, and in particular the ing central banks4. Furthermore, he ar- United States, sought to manage these gues that global economic problems are contradictions by encouraging the develop- much broader than the famous “imbal- ment of financial bubbles based on cheap ances” in the world economy on which in- credit as a way of sustaining demand and stitutions like the IMF focus, arguing in- growth. The deflation of the latest bub- stead, that the recovery is both shaped ble, centred on the US housing market, and undermined by the desperate mea- has shattered the global banking system sures that leading capitalist states took in and precipitated a global economic slump. the autumn of 2008 to prevent the financial The flows of manufactured goods and capi- crash producing a global economic depres- tal across between China and the US drove sion on the scale of, or perhaps even deeper the economic boom of the mid-2000s-and than, that of the 1930s5. The sheer scale financed the speculative bets by Western of these efforts, particularly by the Federal banks and shadow banks that precipitated Reserve Board (the Fed), the US central the crash and the slump at the end of the bank, is only now becoming clear. For ex- decade. The tactics employed by ruling ample, between March 2008 and May 2009 elites - rescuing the banking system, flood- the Fed pumped a total of $9 trillion into ing the markets with vast quantities of ef- American banks and international banks fectively free money, and in some cases, with US interests. A Bank of England increasing public spending to counter the study estimates that “intervention to sup- fall in demand for goods and services - port the banks in the UK, US and the euro brought a degree of temporary stability to area during the current crisis . . . to- the world economy and succeeded in avert- tals over $14 trillion or almost a quarter ing a total collapse of capitalism. What 3World Economic Outlook, International Monetary Fund. “Growth Resuming, Dangers Remain”, (April 2012), http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf 4Alex Callinicos, “Contradictions of Austerity”, Cambridge Journal of Economics, 36 (2012). 5Alex Callinicos, “Shifting Sands of the Crisis” International Socialism 125 (winter 2010), http: //www.isj.org.uk/index.php4?id=602&issue=125 6From a Bank of England presentation by Piergiorgio Alessandri and Andrew Haldane, available online at www.bankofengland.co.uk/publications/speeches/2009/speech409.pdf 7James K. Jackson

4 these tactics did not succeed in doing was The response to the crisis by the Euro- preventing the system entering the most pean ruling class - of both core and periph- severe economic crisis since the 1930s. In- ery - has been profoundly neoliberal: cut- deed, they ultimately exacerbated the cri- ting public spending, raising indirect taxes sis and are now continuing to dog the re- (the most inequitable form of taxation), re- covery. ducing wages, attacking the welfare state, privatising public assets and further mar- Eurozone ket liberalisations. Their paramount con- cern has been to rescue the euro. In or- While the origins of the current crisis – the der to calm the markets the European rul- famous subprime mortgages – were Amer- ing class announced the establishment of ican, it is in the Eurozone that the epi- the European Financial Stability Facility centre of the crisis can be located. In (EFSF), an emergency fund of e440 bil- the five years since the onset of the crisis lion. It quickly proved to be inadequate there have been literary hundreds of anal- and will be replaced in September by a yses outlining the casual chain linking the larger permanent e700 billion fund, the US subprime mortgage crisis to the cur- European Stability Mechanism (ESM), al- rent ongoing crisis in Eurozone. Simply though this too is considered largely inade- put, the crisis in the US sub-prime mar- quate to deal with the pure scale of the cri- ket led to the collapse of Lehman brothers sis. They also introduced a Long-Term Re- in autumn 2008. This led to a major fi- financing Operation (LTRO) by the ECB nancial crisis that ushered in a global re- which provides unlimited amounts of liq- cession resulting in increasingly large fis- uidity at very low interest rates to Euro- cal deficits for some the world’s leading pean banks for up to three years. This is economies. For example the US currently a very good example of the priorities of owes around $15.5 trillion, Japan owes European ruling class. They are prepared around $11.5 trillion, whilst all of the key to allow the ECB to advance hundreds of European economies have debt to GDP ra- billions of to European banks while tios in excess of 75%. Countries in the peripheral countries have been forced to eurozone periphery, Ireland and Greece in accept bailout packages at the punitively particular, already deeply indebted after high interest rates and have been forced years of weakening competitiveness com- to accept unprecedented levels of auster- pared to the European core, found their ity. In other words, the cost of the cri- access to international bond markets re- sis was shifted onto the backs of working stricted. Facing insolvency, these countries class people. As Lapavitsas argues: “By posed a serious threat to the solvency of early 2011 the class content of the pol- the entire European banking sector that icy to rescue the euro had become crystal had over the previous decade lent billions clear: first to defend the interests of finan- to the periphery. To rescue the banks the cial capital by protecting bondholders and eurozone had to bail out the periphery. other lenders, second to promote the inter- However these bailouts were accompanied ests of the industrial capital by crushing by severe austerity requirements that re- labour costs.”8 Furthermore, there is lit- sulted in deeper recessions and made it in- tle evidence to suggest that these policies creasingly difficult for these countries to re- of imposing austerity on peripheral coun- main in the Eurozone. tries will succeed as an exit strategy out 8Costas Lapavitsas et al., Crisis in Eurozone, London: Verso, 2012.

5 of the crisis. Greece, Ireland, Portugal, tant Europeanists acknowledge the class along with Spain and Italy, are all find- interests of the European project but ar- ing it increasingly difficult to service their gue that if euro collapsed nationalism and public debt and it is looking increasingly isolationism would dominate working class likely that many will probably default any- politics. They argue for a radical debt-led way. And here lies the conundrum: Europe default, but writing debt off unilaterally must endure apparently perpetual reces- while remaining within the framework of sion, including the economic enslavement the eurozone, and forcing the main powers of millions of people. It is also failing as to take the losses. a strategy. Five months after the Greek There are various problems with both government accepted yet another new res- of these strategies but what they share is cue plan of e174 billion it was once again a profound misunderstanding of the sys- on the brink of default, forced to appeal tematic nature of the current crisis and a to Germany and the EU for a further two failure to grasp that the euro has served to extensions on its second bailout. mediate that crisis against labour and in favour of capital. First, as we have seen, The Euro the eurozone crisis must be understood in the context of the current crisis of capi- In the context of this unprecedented cri- talism. The worst was averted through sis there has been much debate within the state intervention, partly to support the European left on the question of the euro. banks, partly to sustain demand. This ac- Party of the European Left, ATTAC, sec- tion however led to the next and most se- tions of the Fourth International and Left vere stage of the crisis, that of public debt; Bloc in Portugal have all argued against as economies everywhere went into reces- exit from the Euro. The Greek economist sion and tax revenues began to decline, Yanis Varoufakis has advanced a pro-euro the result was ballooning public deficits. strategy for the European left that he aptly Once the sovereign debt crisis had acquired titles, ‘A Modest Proposal’9. His pro- these enormous dimensions in the Euro- posal has proved quite popular with sec- zone, it became clear that European and tions of the Irish left including Sinn F´ein. other banks were at risk, threatening to What all these pro-euro proposals share reignite the global banking crisis. The pe- is the position that the eurozone can be ripheral countries of the EU were hit espe- reformed in the interests of working peo- cially hard leading to loss of control over ple, creating a ‘good euro’. They can public finances in Greece, Ireland and Por- broadly be divided into two currents which tugal, while Spain continues to struggle to the economist Costas Lapavitsas refers to avoid the same fate. Core countries like as the ‘ardent’ and the ‘reluctant’ Euro- Germany, saw exports collapsed and their peanists. The ardent Europeanists tend banks exposed to bad banking debts. The to ignore or downplay the class and im- persistence of the crisis also led to the spec- perial interests at the heart of monetary tre of contagion for core countries, primar- union and the EU as a whole. They ar- ily Italy. gue for consensual or creditor-led default It cannot be overemphasised how the which, they claim, would lower the level tendencies of the global crisis were medi- of peripheral debt without disturbing the ated in Europe by the institutional mech- mechanisms of the eurozone. The reluc- anisms of the Eurozone. Indeed, the spe- 9Yanis Varoufakis, ‘A Modest Proposal’ available at http://yanisvaroufakis.eu/euro-crisis/

6 cific character and ferocity of the European words, saving the euro means that a fifth turmoil are due to monetary union. There- of the population of Greece and Spain are fore, the second point that needs to be un- now unemployed and that the welfare state derstood is the nature of the Euro itself. must be destroyed. The Euro is not simply a EU common cur- In order to ensure that this burden rency designed to make trade, finance and is accepted leading European governments travel easier; it is an international reserve have spared no warning of the dire con- currency. This means that it is a form of sequences that would follow the disman- world money. As Costas Lapavitsas argues tling of monetary union. In doing this they “The euro is designed to act as a means of have found enthusiastic cheerleaders every- payment and hoarding in the world mar- 10 where from academics to the media; all of ket” . It serves the interests of the ma- whom are only too willing to paint apoc- jor states like France and Germany, which alyptic pictures of life after the euro. As control it, as well as the powerful capital- Lapavitsas writes: “The inculcation of fear ist enterprises that use it. The euro at- has been made easier by the domination tempts to compete against the dollar but of Europeanism among the intellectual and without a powerful state to back it up. political forces that could have offered an Relying on an alliance of disparate states alternative narrative. For more than two with economies of divergent strengths, it is decades, the notion that the euro is the considerably weaker than the dollar. The epitome of European unity has grown in Euro has also crystallised the inequalities influence among the politicians and the op- and tensions that are inherent within Eu- tion makers of Europe. Even more strik- ropean capitalism. The European Mone- ingly, a form of money that aims at serving tary Union (EMU) has created a split be- the interests of big banks and big business tween core and periphery. The periphery has been presented as an inherently social- lost competiveness in the 2000s develop- democrat project.”12 ing deficits with the core and accumulating large debts to the financial institutions of This brings us to one of the key, al- the core. As a result Germany has emerged though largely ignored, problems with the as the economic master of the Eurozone. European project itself; the profoundly Therefore we need to understand that the anti-democratic nature of the European euro is not just an economic project it Union. The has, since its is also a political one and this is why inception, struggled with democracy, con- the president of the ECB, Mario Draghi, sidering it to be a problematic concept that proclaimed earlier this summer that the interferes with the grand designs of elites euro was “irreversible” and that the ECB who think they know best. When Ireland would do everything in its power to pro- voted no to the Nice Treaty and later again tect and save it11. However what the Eu- to the Lisbon Treaty, it was told to come ropean elites have done is forced the cost up with the right result in a second ballot. of defending the common currency onto Yet as Perry Anderson argues insulation the working people of Europe. In other from any form of popular control and ac- countability is the founding logic of all the 10Lapavitsas, Crisis in Eurozone, 29. 11Josephine Moulds, “Euro is irreversible, declares European Central Bank president Mario Draghi” 26 July 2012. http://www.guardian.co.uk/business/2012/jul/26/euro- irreversible-mario-draghi-ebb 12Lapavitsas, Crisis in Eurozone

7 complex nexus of technocratic and expert- the attempt to create a currency which is staffed agencies which form the backbone a major player on the world stage has re- of the EU institutions13. sulted in the worsening of pay and condi- For example, the European Central tions for European workers. Yet, because Bank wields immense power, indeed since the European ruling class have managed the onset of the current crisis it power has thus far to present exit from the euro as the dramatically increased, yet no one knows nuclear option, we need to think strategi- how the unelected members of its govern- cally about how we present our arguments. ing council vote because no minutes of There is no easy solution to the crisis and meetings are ever published. Europe to- in the absence of sustained levels of work- day is run by a cabal of technocrats make ers struggle options are limited. It would decisions that result in the immiseration be a mistake to argue that the solution of millions of people across the continent. to Ireland’s and Europe’s problems is just They include: the head of the IMF and to exit the euro. Indeed some right wing former French Finance Minister, Chris- economists make similar arguments as they tian Lagarde; the President of the Eu- argue that exit from the euro would force ropean Central Bank (ECB) and former down the cost of wages and make coun- vice-President of Goldman Sachs, Mario tries like Ireland and Greece more compet- Draghi; the President of the European itive. As socialists we have to offer a dif- Commission, Jos´e Manuel Barroso; the ferent logic; one that favors the interests chairman of the Eurogroup, Jean-Claude of labour not capital. Therefore instead of Juncker; president of the European Coun- arguing in the abstract for an exit from the cil, Herman van Rompuy; and Olli Rehn, euro we should combine this with a call for Europe’s economic and monetary affairs a cancellation of all sovereign and banking commissioner. These individuals who are debt and an end to austerity. This would unelected and therefore unaccountable, in- allow for a reassertion of democratic con- creasingly make all of the most important trol of monetary and fiscal policy and for decisions in Europe. They decide if and the creation of an economic policy designed when Greece or Italy can hold elections. to stimulate job creation in the interests of They decide when Ireland, Greece or Por- workers and the poor. Certainly such poli- tugal get the next tranche of bailout cash cies would create a collision course with and, crucially, at what cost. The only the EU and ECB and the success of such thing that matters to these individuals is a strategy is not predetermined. It would what the markets think. depend on the balance of forces and the When addressing the question of exit levels of struggle and resistance in Ireland from the Euro we need to keep a num- and other European countries. ber of factors in mind. Firstly we need to focus and challenge the strategic choices Conclusions of the European ruling class instead of fo- cusing on malfunctioning institutional ar- While we cannot yet predict the long-term rangements. This involves acknowledging trajectory of this crisis, four things are al- both the class and imperial nature of the ready very clear. First, this recession is no European project. Workers in both the mere hiccup; it is a deep, long-term sys- core and periphery have neither stake nor tematic crisis. It has revealed what, from interest in the success of the euro. Indeed, a Marxist perspective, has been clear for 13Perry Anderson, The New Old World, London: Verso 2009.

8 many years; that capitalism is suffering a to conclude that the radical left had missed long-term decline in profit rates and has its opportunity. However the deep, sys- been for some time. Fears of a sovereign tematic and prolonged nature of the cur- default are now not only stalking weaker rent crisis means that there are deep stress eurozone economies like Greece, Ireland fractures emerging and placing severe pres- and Portugal but core countries like Spain sure on capitalist political structures, ex- and Italy. The implications of a Greek posing their fault lines.Moreover, as Call- default (e250-e350 billion) are enormous. inicos has argued, “one of the most impor- If Greece defaults it will be the biggest tant variables in politics is time”. A key sovereign default in history and would cer- lesson of the Great Depression was that tainly have contagion effects throughout a major economic crisis is itself a histor- the entire capitalist system in the same ical phenomenon that passes through dif- way as the US subprime crisis and the col- ferent stages and that the process is un- lapse of Lehman Brothers did back in 2008. even. In the early stages of the current cri- Second, those who control and run capi- sis there was precious little evidence of any talism have no real understanding of their wide scale resistance to the system. Yet, in own system. Third, and this is particu- the past twenty-four months this situation larly evident within the Eurozone between has been dramatically reversed crucially Germany and France, the crisis is exacer- with the Arab revolutions but also with the bating political divisions within the ruling emergence of the occupy movement. The class over how to solve capitalism’s prob- spread of austerity across Europe provoked lems. Finally and most importantly we powerful outbreaks of resistance, from gen- have seen the reemergence of a global re- eral strikes in Greece, France, Spain and sistance to capitalism. Portugal to student resistance in Britain. These powerful movements of resistance After the initial onset of the crisis back have challenged the widely accepted be- in the autumn of 2008 there was a general lief that the spread of neoliberal globalisa- ideological malaise among sections of the tion has destroyed the collective power of left who argued that when confronted with workers as footloose capital and insecure a genuine once-in-a-century crisis of global employment supposedly erode bargaining capitalism, the radical left has fumbled and strength. Indeed the opposite is now the missed a major political opportunity. Oth- case with globalisation creating powerful ers argued that neoliberal capitalism had new concentrations of workers around the produced a widespread sense that not only world. is capitalism the only viable political and economic system, but also that it is now Politics, Lenin famously remarked, is impossible even to imagine a coherent al- concentrated economics. The politics of ternative to it. The crisis had reinforced the period ahead will be determined by and accelerated this rhetoric and that we the clash between the pressure for govern- all must face the hard facts of economic ments to impose harsh austerity and the ‘reality’ and that there was little real hope reluctance of the mass of people to accept of change. The problem with this argu- them. The key question will be what form ment is that it ignores the depth and na- those politics take. As we have been ar- ture of the current capitalist crisis. If the guing since 2008 this crisis reflects a long- crisis were simply a relatively short, se- term systematic crisis in the capitalist sys- vere shock whose effects were largely ab- tem and as such it is likely to be a long, sorbed by the bailouts it might be possible slow and deep recession. There is no easy

9 “exit strategy”. Indeed, attempts by gov- sis as they defend their national capitalist ernments to find an “exit strategy” are interests. All this means that the current leading to an ideological crisis as tensions period will present enormous opportunities emerge within and between states. It is for the left to grow provided it opens itself likely that we will continue to see con- up to the swathes of people who are be- flicts emerge between nation states over coming politicised everyday. the measures needed to overcome the cri-

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