EUROPE’S WORSENING government debt crisis, a rising U.S. jobless rate, and a widening international currency war heightened fears about the fragile world economy as 2010 drew to a close. At the same time, a growing revolt against austerity—a general strike in Portugal, a student rebellion in Britain and a mass protest in Ireland that followed earlier waves of struggle in France and Greece—highlighted the radicalization being driven by the recession and its aftermath.
This latest phase of the economic crisis centers on “sovereign debt”—that is, the bonds sold by sovereign governments to raise money to fund their operations. And the crisis isn’t confined to small, “peripheral” European economies such as Greece, Ireland and Portugal. By early December, speculators were taking aim at the government bonds issued by Spain, Belgium, and Italy as well, pressuring those governments into their own austerity drives. Meanwhile, in the United States, the corporate media was working overtime to promote the austerity demands of President Barack Obama’s bipartisan commission on the deficit, which took aim at Social Security and Medicare in an effort to cut more than $3 trillion in spending out of the U.S. economy over 10 years.
At the same time, however, the media gave only passing attention to the release of details about the Federal Reserve’s $9 trillion in short-term loans to 18 financial institutions at rock-bottom interest rates in late 2008 and early 2009. The message: When Wall Street is in trouble, the government has virtually unlimited amounts of money. But when working people are suffering from the longest period of mass unemployment since the Great Depression of the 1930s, they’re told to make do with even less.
Ireland epitomizes the new politics of austerity. This tiny country of just 4.5 million people had rebranded itself the “Celtic Tiger” in the 1990s, adopting a corporate tax rate of just 12.5 percent that attracted a surge of business investment from the United States and elsewhere. Finance capital also poured into Ireland to take advantage of banking regulations modeled after notorious tax havens in the Caribbean. When the financial meltdown came in the fall of 2008, the Irish state stepped forward to try to preserve those advantages by guaranteeing the transactions of Irish banks. In short order, Britain followed suit for fear that depositors would flee shaky British banks for government-backed Irish ones. Britain’s move compelled other European states and the United States to inject capital into their own banks and essentially guarantee them as well. Essentially, Ireland’s bank bailout stampeded the big Western economies into financial state capitalism as a desperate measure to keep the world financial system from total collapse.
The problem for Ireland was that the assets of its private banks were five times bigger than the country’s GDP of $228 billion. By late 2010, the money the Irish government slated for bank bailouts had reached $60 billion. As Alen Mattich wrote on his blog at the Wall Street Journal Web site, “When Ireland’s banks were threatened by depositor runs during the early days of the credit crunch, the government stepped in to guarantee the sector’s liabilities. A huge burden of private-sector Irish debt suddenly became public.”
Yet despite harsh austerity measures, state finances continued to deteriorate. As was the case in Greece earlier this year, speculators concluded that Ireland would eventually be unable to fully repay its debts. So with speculators driving interest rates on Irish government bonds to impossibly high levels, Ireland accepted a $113 billion bailout from the “troika” of the EU, the European Central Bank, and the International Monetary Fund (IMF). Those bureaucrats are fronting for the German capitalist class, which is using its economic power to ensure that German banks can collect their debts and German industry consolidates its dominant role on the continent. In return, the Irish Republic, which endured famine and emigration in its long struggle against British colonialism, has essentially given up control of its financial decisions to Germany.
To pay back those debts, Irish workers will be forced to accept a 12 percent cut in the minimum wage, a reduction in welfare spending of 5 to 10 percent and a 5 percent reduction in weekly unemployment benefits. Thousands of public sector jobs will be lost.
And emigration from Ireland, which had stopped during the go-go years of the 1990s, is already on the rise, thanks to a 13 percent unemployment rate—an estimated 100,000 people are expected to leave the country by 2014.
Meanwhile, that $113 billion in European rescue money will only briefly pass through the accounts of the Irish state on its way to the Irish banks. Those being rescued in this package aren’t the vast majority of Irish people, but bondholders determined to avoid losses—a “haircut” in financial industry slang—on their investments in crippled Irish banks. In fact, the big EU countries are bailing out Ireland to bail out their own banks. According to the Bank for International Settlements, British banks hold about $131.6 billion in Irish debt, and their German counterparts are on the hook for $138.6 billion. French banks have $43.6 billion tied up in Ireland, and for U.S. banks, the figure is $57 billion. Thus the Irish have to go hungry once again so that nothing spoils the lavish meals of the world’s financial elite and their political operatives.
The Irish collapse underscored the limits of the European rescue attempts so far. In the aftermath of the troika rescue of Greece in the spring, EU leaders created the $589 billion European Financial Stability Facility (EFSF), which was part of a $950 billion commitment by European governments to stop Greece’s financial crash from spreading not only to Ireland, but also Portugal, Spain and Italy. The EFSF, however, didn’t actually have any cash on hand to cover the Irish bailout. That’s because the EFSC isn’t an actual pot of money, but a special purpose vehicle that must itself raise funds on the bond market. Not surprisingly, speculators called the EU’s bluff by forcing up interest rates on Irish bonds.
Yet the troika’s dubious rescue of Ireland didn’t placate the bond market. Interest rates continued to rise on government debt issued by Portugal, Spain and even Belgium. Thus European leaders scrambled to see how to raise more cash for the future. One proposal was for the European Union to create its own bonds to raise money, although Germany, which would have to organize such an operation, shot down the idea. However, the threat of a debt default by Spain—a country too big to save—may yet concentrate the minds of European leaders as they squabble over how to resolve their sovereign debt crisis. “The very future of the single currency could be at stake should the full force of the crisis spread to [Spain and Italy],” wrote Richard Milne in the December 3 Financial Times. “That raises the pressure on European authorities to find a solution to satisfy the very bond markets that many of them like to blame for the turmoil.” Italy, with $2.4 trillion in government debt, has to issue $450 billion in bonds in 2011 to finance its operations—and will have to pay brutally high interest rates to do so.
Spain is particularly vulnerable, owing to a burst housing bubble that left a mountain of private debt. Although government debt is relatively low, the combined public and private debt in Spain amounts to 270 percent of the country’s GDP. Investors assume that the Spanish government will be compelled to prop up the banks that are full of bad real estate loans, so they’ve pushed up interest rates on Spanish debt. The Socialist Party government has responded with severe austerity measures that have only worsened an economy beset with an official unemployment rate of about 20.6 percent.
Germany’s directive to Spain, as elsewhere, is to carry out more cuts. Typically, debt-burdened countries hit with recession choose to devalue their currencies in order to reduce that debt and make their exports more competitive on the world market. But having embraced the euro, Greece, Ireland, Portugal, Spain and Italy don’t have that choice. Instead, they’re being compelled to carry out a so-called “internal devaluation”— drastic cuts in wages and social spending to try to lower labor costs.
But austerity won’t overcome the crisis—not even in capitalist terms. Wage cuts, layoffs and cuts in social spending are causing the Greek economy to shrink still further. This will make it almost impossible for the Greek government to pay off its debts, which by November 2010 stood at 126.8 percent of GDP—already much worse than 115.1 percent that the government anticipated just six months earlier. Essentially, the world’s capitalists are repeating their disastrous policies of the early years of the Great Depression, when government attempts to revive the economy with cutbacks only deepened the slump.
What’s more, Greece, Ireland and perhaps other European countries will sooner or later be forced into a partial default on their debt. Germany is already preparing the ground politically for that day, as Chancellor Angela Merkel keeps insisting that banks and bondholders must ultimately absorb a share of the losses rather than absorb and endless stream of taxpayer-funded bailouts. An editorial in the Financial Times agreed with Merkel, stating, “If public money is again used just to buy time, the problem will soon return, more contagious than ever.”
But forcing big losses onto banks and other financial institutions is a game of financial Russian roulette. Merkel’s mere mention of the idea led investors to dump the bonds first of Ireland, then Portugal and Spain, which made the bailouts all the more necessary. Moreover, banks in Europe and the United States are still riddled with toxic assets left over from the burst housing bubble. So there’s considerable risk that even a partial sovereign debt default could trigger another financial panic, especially if it involves a large economy like that of Spain or Italy.
Financial Times columnist Gideon Rachman summed up the problem:
One of the hallmarks of the unfolding financial crisis is that even “experts” quickly concede that they do not have answers to most of the really important questions…. How do you balance the moral hazards of propping up the banks, with the practical hazards of letting them default? Even if you wanted to break up the European single currency, how, technically, would you do it? Would it be possible even to discuss breaking up the euro, without provoking capital flight and renewed banking crises in the weaker economies? If the answer to that problem is to reimpose capital controls, how is that compatible with preserving the European single market—or even the EU itself?
In the United States, austerity is already in full swing at the state and local level. According to the Center on Budget and Policy Priorities, state and local governments have wiped out 407,000 jobs since August 2008. These cutbacks were an unstated policy of the Obama administration, which failed to include sufficient aid to state governments in the stimulus package passed in early 2009.
Now, with Republicans taking control of the House of Representatives, austerity will be front and center in U.S. politics for the foreseeable future. Obama himself signaled his willingness to collaborate with Republicans on cutbacks when he announced a two-year pay freeze for all non-military federal employees. But that will save just $5 billion over two years, according to the Office of Management and Budget—a mere rounding error in U.S. government budgets. And if the proposed deal between Obama and the Republicans to temporarily extend the Bush-era tax cuts for the top income brackets goes through, it will cost the U.S. treasury $38.8 billion just through 2011. While Obama is promising to make cuts in military spending as well, the proposed cuts would leave in place the occupations of Iraq and Afghanistan and a military machine several times bigger than the combined strength of its potential rivals.
Austerity measures in the United States are unlikely to be carried out as quickly as in Greece or Ireland, nor will they cut as deep. But in a country where 17 percent of the workforce is jobless or underemployed, and in which one in five families don’t have secure sources of food, any cuts to the meager remains of the social safety net will have a devastating impact.
That’s why it’s so important to look the example of Europe, where, until the recent explosion of protests, the left and the unions have been on the retreat for years, just as they have in the United States. If the first wave of struggle hasn’t been successful in stopping the cuts, it shouldn’t be surprising. The left, the unions and social movement organizations aren’t yet strong enough to push back a united capitalist class that’s determined to push its program through. But the scale of the attack gives working people—in Europe, the United States and the world over—no alternative but to fight back. The struggles of recent months are producing a new generation of leaders who will need to develop the organization, politics and strategies needed to win. Precisely how this will play out is unpredictable. But the resistance is already taking shape.