By James Meadway
26 September 2011
After a tumultuous week, it is now widely admitted that the global financial system, and perhaps the world economy, is close to collapse. The news is uniformly bleak. Growth across Europe and North America is weak to nonexistent. Unemployment is high and rising. Even China is showing early signs of a slowdown.
Stock markets across the world continue to slide, despite the – increasingly desperate – appeals of national governments and international bodies like the G20 and IMF.
But to understand why this is happening, we need to step back from the headlines and the market hysteria. The crisis falls into three principle parts.
Europe: the epicentre
Most immediately, there is the aftershock from the 2008-9 financial crisis. The collapse of the financial system prompted bailouts from governments across the world, totalling (on the IMF estimate) $7,000bn. A very sharp recession also resulted, pushing up unemployment spending while pushing down tax receipts. This combination led to very dramatically increased government debts and deficits. But the bailouts did not end the crisis – they simply shifted it elsewhere. A crisis of private finance has become a crisis of public debt, with its epicentre in Europe.
Serious imbalances were created inside the eurozone in the decade from its launch. Each country, on entering the euro, fixed its exchange rate relative to other euro members. Germany entered at a low rate; southern European countries entered at a high rate. This made German exports to southern Europe very cheap, and they exported more as a result. Germany and other northern European economies began running large trade surpluses against the south. These surpluses were then recycled back into southern Europe as debt, fuelling the purchase of exports. Rising surpluses and savings on one side were matched by rising deficits and debts on the other.
This imbalanced system was pushed into chaos by the financial crisis. Countries already in debt found themselves saddled with seriously increased debt burdens Greece, Ireland and Portugal all found themselves requesting bailouts to help meet their obligations to their creditors. The danger, since at least October 2009, was that a country would be forced to default – fail to pay its debt and interest. If a debtor defaults, their creditor takes a hit. The costs can be very high as apparently valuable loans are immediately devalued – perhaps even to nothing.
Since it was European banks, especially in France and Germany, that held very substantial sums of southern public debt, they were also threatened by default. And the European banking system was already weak after the last crash. A default by a eurozone member threatened the European banking system. Banks could also crumble, with financial markets identifying major French banks as particularly vulnerable. Since banks hold assets with other banks, the crisis can spread like ripples throughout the system. UK banks, for example, have little Greek debt, but substantial exposures to French and German banks. A Greek default therefore threatens them. This is what is meant by financial contagion – the possibility of financial crisis spreading rapidly across the globe.
What began as a crisis in the financial system became a crisis of public debt. This sovereign debt crisis is now feeding back into the financial system, threatening further collapse. A further banking collapse will create demands for fresh state bailouts. Europe is locked a downwards spiral.
And since Greek public debt is unpayable, with interest payments alone forecast to total 15 per cent of GDP next year, a default is at some point inevitable. A default has been inevitable for some time now; all the EU/IMF/ECB bailouts have done is postpone this. It is moot whether the consequences of a Greek default can be successfully contained by Europe’s institutions. The signs at present are not hopeful.
A desperate fear about the state of their own financial systems has driven governments in Europe into austerity, assisted in the case of Portugal, Ireland and Greece by the IMF and EU. By cutting into public spending now, it may be possible to clear space on the public balance sheet for when the next crisis erupts and further bailouts are demanded.
Spending cuts, however, damage real economic activity. If the government spends less, firms sell less. If firms sell less, they make redundancies and cut wages. A vicious circle spiral downwards sets in. Unemployment rises. The economy stagnates. By demanding spending cuts, governments are privileging financial assets above real acitivity.
The deadlock of private finance and public debt is, as a result, driving stagnation across Europe. And Europe’s political system, comprised of competing national states and dysfunctional European institutions, is unable to break the lock.
Something similar is occurring in the US. No side of the US ruling class has a real solution to the crisis of public debt and stagnation. Squabbling over the essentially irrelevant US debt limit was one symptom of this. Political systems in North America and Europe are deeply sclerotic. They have taken a default option of austerity and to very loose monetary policy, backed up by ‘quantitative easing’ – printing electronic money.
The Bank of England claims quantitative easing boosted output last year. But as recent research has shown, it did so only by pushing up asset prices and corporate profits. The wealthy received the benefits, while the rest of us faced higher inflation, eroding real wages. Another round of quantitative easing would most likely have similar effects, but with added inflationary risks. It is not in any sense a solution to the crisis.
Capitalism, as an international system, has always previously been organised around a leading economy. Because it is a competitive system, divided between competing firms and competing nations, it is prone to disintegration internationally. But if certain minimal ground rules can be established, it can proceed relatively harmoniously. The establishment of these ground rules has historically been left to a leading economy, able to exercise hegemony over the rest.
In the seventeenth century, this was provided by the first capitalist nation – the Dutch Republic. Hegemony shifted to the UK over the course of the eighteenth and nineteenth century, only for that leadership to then be challenged, from the 1870s onwards, by the newly-unified states of the US and Germany. By 1945, the US was the clearly leading, subject only to a much weaker challenge from the USSR.
At each point, shifts in leadership have been associated with extraordinary upheavals. Wars and revolutions accompany the decline of old powers and the rise of possible new challengers.
The US is declining. In the years immediately following Second World War, it was able to fund the reconstruction of Western Europe, fight another major war in Korea within the decade, and provide consistent increases in the standard of living for the majority of its population. Today, its leaders can do little more than wring their hands over Europe. Its huge military can deliver no convincing victories. And, for most Americans, real hourly wages have stagnated or even declined – in some figures, for decades.
All the old centres of capitalism, in North America, Europe, and Japan, are crippled. Newer centres of accumulation are emerging – most dramatically in Asia, centred on China. None of these new centres is close to replacing the declining hegemon. One symptom of that is the failure of the major industrial economies, grouped now in the G20, to agree on a meaningful common programme for the crisis.
Economic dislocation in Old Capitalism affects the New directly. China’s domestic market, at around one-sixth of Europe’s or the US’, is simply not big enough to compensate for the slump in its major export markets. The process of transition is by no means smooth – and, as it occurs, it can open up serious prospects for radical social change, just as it has in the past.
The response of the left
Major economic crises in capitalism always require political solutions. The entanglement of bad debts and economic stagnation with dysfunctional institutions and directionless leadership can only be broken by political intervention. Existing institutional arrangements need to be broken and new paths for accumulation created. The alternative is permanent stagnation – akin to what Japan has experienced for nearly two decades.
There is no guarantee that these political solutions will be progressive. Europe in the 1930s arrived on fascism. The single most important task facing the left, most particularly in Europe, is to offer a clear and credible alternative to the business-as-usual of decline.
End austerity, and increase spending. Tax the rich to pay for public services. Clamp down on finance through tax and legal barriers to prevent the spread of contagion. And mobilise the state’s powers to invest in new, green industries providing decent, secure work.
Default, and exit from the euro, are also on the agenda. No route out of the crisis will be possible without the destruction of a major part of the incredible debt burden now weighing down on economies. For Greece, both default and exit are imperative. Elsewhere, we should argue for a People’s Default – a cancellation of debts against the bankers and the financiers, and in the interests of society.
We have, for the first time since the crisis broke out, a tremendous opportunity to start to assemble the movement internationally that can deliver a programme like this. The European Conference Against Austerity, in central London on 1 October, is absolutely critical. In a short space of time the situation in Europe could take a dramatic turn for the worst. Under these circumstances, clarity and organisation will be essential. The Conference is the place where both can start to appear. A continent-wide movement against austerity, uniting trade unions, campaigners, and all those opposed to spending cuts, has now to be built.