FT-CI

Economic Outlook

A specter is threatening Europe

24/05/2012

By Paula Bach
Thursday, May 17, 2012

The Nobel Laureate in Economics and New York Times columnist Paul Krugman predicted the “Greek euro exit, very possibly next month.” If this prediction comes true, both Krugman and the publications Financial Times and Der Spiegel maintain that the panic would spread to the rest of the eurozone and that the next step would be a run on the banks in Spain and Italy that could lead, either to the possible freezing of bank accounts and prohibiting withdrawals, to an injection of credit from the European Central Bank with “more flexible” policies later, or else, directly to the end of the euro.

Recession: The limits of the financial bailouts

At the end of last year, facing the imminent risk of bankruptcy of some bank that would trigger a new situation like the Lehman Brothers failure, the European Central Bank (ECB) decided to extend the unlimited provision of liquidity to banks at a fixed interest of 1% annually, to 3 years. As we indicated at that time, “that massive injection of liquidity, was far from becoming new credits that would act as a stimulus to the eurozone’s economy,” managing, only temporarily, “to contain a crash, but in no way acting on the tendencies towards recession that are settling in, strongly, in Europe.” (1) Scarcely a few months later, the so-called troika negotiated a new “assistance” plan for Greece and the restructuring of its debt that, as we also indicated, “avoids Greece’s disorderly bankruptcy and its exit from the euro within a short time, but fails to resolve, rather, it brutally worsens, the problems of the country, at the same time leaving big uncertainties about the future of the European Union (EU).” (2)

If the European policies of financial bailouts contained the tendencies to a “Lehman Brothers-style” crash, the violent adjustments, in classical neo-liberal style, accelerated the recessive elements, not only in the weakest countries, but among all the members of the eurozone, that grew 0% during the first quarter of the year. The Italian economy contracted by 0.8%, recording three consecutive quarters of negative GDP growth; Spain contracted by 0.3%, recording 2 consecutive quarters of decline. Greece contracted by 6.2% again; France recorded zero growth, and Germany, with an extremely weak growth of 0.5%, represents the most vigorous economy of the eurozone. The irony is that this predominantly recessive situation would end up provoking, on the one hand, severe political crises, like that currently taking place in Greece, and, on the other hand, conditions of bank insolvency, as in Spain, that, by other means, revived tendencies towards the financial crash.

Spain: Recession and bank nationalizations

To the policies of fiscal austerity and cuts in social spending implemented in Spain during recent years, is added the austerity plan and labor reform (that makes layoffs cheaper and easier) launched by Rajoy’s conservative government to comply with the demands from Brussels and Berlin. These measures have only deepened the recession, with the unemployment rate reaching close to 25%, with which, the total number of the jobless reached an historic maximum of more than 5.5 million people. The continuing recession in Spain is causing a persistent fall in property values that makes a large number of the people that took out a mortgage in recent years, currently owe more than their homes are worth. It is the result of the fact that under the policy of deleveraging and cleaning up bank balance sheets and liquidating their real estate stock, the banks’ risk is transferred to the buyers. If we connect this situation with the reductions of social benefits and the increase in unemployment, it is understandable that the weak link of the Spanish economy is located in its banks, extremely involved in the business of real estate speculation. Bankia, the fourth-largest banking company of Spain, was supposed to be nationalized a few days ago, when the government introduced a package of measures that includes a large increase in provisions to the banks. However, these measures increased distrust in the banking sector, that led the stock market declines, and they did not manage to slow down the flight of capitals, a matter that led the Minister of the Economy to ask the ECB for more backing in purchasing the Spanish debt. In its report to the SEC, the BBVA (second-largest bank in Spain) brings up the fact that financial tensions in Europe are currently worse than those that followed the bankruptcy of Lehman Brothers in September, 2008.

A neo-Keynesian united front

Spain’s pressing economic and financial situation should be understood as part of a European context, in which strong social and political tensions are prevalent. To the fall of 16 governments in Europe must be added the recent election results. (3) A complex political context where elements of polarization, to the right and left, stand out, in the framework of the prevailing tendencies towards recession, creates in broad leading groups of the bourgeoisie, not only the “suspicion” that the financial measures implemented up to now could turn out to be insufficient, but a profound fear that the financial policies from Berlin and Brussels will finally make the situation go out of control. It is in this context and over and above the urgent nature of the financial and economic situation, that one must understand the predictions of Paul Krugman, Nouriel Roubini and The New York Times, The Financial Times, and Der Spiegel. A sort of neo-Keynesian united front is growing, headed by Krugman himself, but which could include even important figures like Hollande, or the leader of Syriza, the coalition of the reformist left, ready to avoid a collapse of the euro, but pressing as much as possible so that the German establishment and Brussels will “take it down a notch.” This could mean various measures, such as a more decisive intervention from the European Central Bank, no longer lending to banks and accepting debt securities as collateral from the various states, but buying debt securities directly from the several states, the acceptance of some type of eurobond plan to ease the debt burden, that the ECB will authorize a certain level of inflation that will allow the economies of southern Europe to regain competitiveness at the expense of the famous Keynesian “money illusion” (4), like the imposition of some kind of puncture on the financial sector. That is, policies similar to Obama’s half-hearted measures in the United States. But let us recall that not even a qualitatively more daring reformist policy, like that implemented by the Roosevelt administration in the United States, beginning in 1933, enabled the US economy to recover the level it had previous to the crisis of 1929. Shortly thereafter, the preparation for the Second World War, with the setting up of the military-industrial complex parasitically exploiting a demand guaranteed by the state, signaled the beginning of the real recovery of the US economy.

But will Greece finally leave the eurozone? Different analysts maintain that the market has been preparing for such a situation and that the measures already implemented by the ECB, for the ultimate “bailout” and restructuring of the Greek debt, would have outlined a perspective of relative containment, because of which, Greece’s exit would not necessarily entail the disintegration of the eurozone. Although this hypothesis cannot be ruled out, one must bear in mind that the political crisis and the worsening of the situation in Spain and also in Italy undermine the scope of this contention. Will the weakened Merkel find herself forced to implement some kind of flexible version of her policy? We cannot know; what is certain is that, as Krugman explains well in his most recent book, the current situation resembles the way John Maynard Keynes described the decade of the 1930’s: “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” (5) If that chronic state mainly affects Europe, it also affects the weak US economy and threatens the no longer so vigorous Chinese economy. There are no reassuring solutions for the worst crisis in history since the 1930’s, in which elements of political polarization are beginning to emerge, and in which any strategy designed by the bourgeoisie is going to be directed at unloading the crisis, more or less obviously, onto the shoulders of the workers, by preparing new and worse catastrophes.

Notas:

1. Cuestiones estratégicas (“Strategic matters”), Paula Bach, La Verdad Obrera, N° 460.

2. Postergan la bancarrota por temor a que se hunda el euro (“They are delaying bankruptcy out of fear that the euro will sink”), Juan Chingo, La Verdad Obrera, N° 464.

3. See El triunfo del Partido Socialista en Francia, reportaje a Juan Chingo (“The Socialist Party’s Victory in France,” an interview with Juan Chingo), and Elecciones en Grecia: un rechazo a los partidos de la austeridad (“Elections in Greece: a rejection of the pro-austerity parties”) Alejandra Ríos, La Verdad Obrera, N° 474. To these results must be added the recent defeat of Angela Merkel and her government coalition, the CDU, in North Rhine-Westphalia, at the hands of the Social Democrats, which was interpreted as a national plebiscite.

4 . A widespread reduction of wages concealed under the inflationary mechanism. The nominal increases of wages are always below the level of inflation, on account of which their value in real terms falls, but as they nominally increase, they create the illusion that they are growing, and that stimulates consumption.

5. ¡Acabad ya con esta crisis! (“End This Depression Now”), Paul Krugman, 2012, Editorial Crítica, Barcelona, España.

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