What’s at Stake in the EU Crisis?

Photo: World Economic Forum
Angela Merkel

By Tom O’Donnell

The outcome of the latest EU summit is an unqualified success for the German bourgeoisie against both its external competition in the United States and its internal rivals, especially President Sarkozy. However, it is unlikely that this will bring an end to the European crisis and further decisive measures will be required.

The relationship of forces

The long-standing aim of US imperialism has been the break-up of the Euro Area and weakening of the European Union – or at the very least its clearer subordination to the US’s own interests. Taken as a whole, the embryonic Euro Area economy is the only entity which currently approximately matches that of the US itself. Increased integration raises the productive potential of the European economy. That this increased potential is largely unrealised over two decades does not remove the threat that this development poses to US interests.

Politically, the election of Sarkozy had represented a significant break from the dominant anti-US tradition in French politics of Gaullism. More recently, the involvement of the US-dominated IMF in the various European bailouts represented an important financial bridgehead into the financial reordering of relations within the Euro Area. It is notable that the demand for privatisations in the crisis-hit countries has moved up the agenda from that time. Privatisations at fire-sale prices are the most direct way that US corporations can benefit from the crisis.

Ahead of the summit, European Central Bank (ECB) President Trichet and President Sarkozy had been insistent that there would be no private sector involvement in the bailout, that is the banks would be entirely unscathed. Trichet is increasingly the spokesperson for the largest European banks. Sarkozy’s opposition arises because French banks have the greatest level of loans outstanding to Greece (along with Switzerland), and nearly double the level of German exposure to losses. In addition, Sarkozy had attempted a last-ditch defence of French banking by calling for an EU-wide bank tax as an alternative. This would have represented a widening of the losses among European banks who have little or no exposure to Greece and a subsidy for those who do, primarily French and Swiss banks.

Within Germany, leaders all of the main parties representing the interests of German capital, the SPD and FDP along with Chancellor Merkel’s CDU/CSU, were unanimous that a bailout must be put in place and that no country would be forced out of the Euro Area. This is despite the widespread popular opposition to further German taxpayer involvement in bail-outs of any kind. The reason for this position is because German capital is the largest beneficiary of the creation of both the EU and Euro Area. As the largest and one of the more productive European economies, the economies of scale possible in the Eurozone accrue to German businesses more than any other. Providing a large unified market and preventing competitive devaluations is evidently a prize German capitalism is willing to paying for.

The bailout

The size of the new bailout for Greece is almost the same as the last, €109bn compared to €110bn in May 2010. But the content is very different. For the first time there is a ‘haircut’ or loss for the private sector banks representing an estimate 21% loss on their total holdings of Greek debt. Banks are expected to contribute €37bn in debt swaps and ‘rollovers’, taking up new bonds when existing debts mature. This rises to €50bn when direct losses are applied to another €13bn in bonds. There will also be a combination of lengthening the terms of the debt from European bodies and sharply reducing the interest rate on it. This latter concession will also apply to Portugal and Ireland, where the governments had previously accepted wholly punitive rates from the EU which were contributing to the imminent threat of default.

These measures and the rejection of the bank tax represent a defeat for Sarkozy. The commitment to maintain the unity of the Euro Area also represents a set-back for the strategic interests of the US, and a victory for Chancellor Merkel and German capital.

Crucially, the insistence on no private sector, that is banking, participation in the bailouts has been breached. While there were grave, solemn and binding declarations that this was a one-off, unrepeatable concession to Greece alone, the default genie is out of the bottle. The credit ratings’ agencies seem sure to declare Greece in default as a result. It was repeatedly claimed by Trichet, Sarkozy and others that a default would be catastrophic for the European project, but the outcome is likely to be far more prosaic. Since credit ratings only matter to private investors, and there is no plan for Greece to return to private borrowing for years, the credit rating is not a material issue.

If not governments, then at least progressive forces in Lisbon, Dublin and elsewhere will be eyeing the response to a declaration of default with some interest. Their economies too are groaning under the weight of an insupportable debt burden, which the latest cut in interest rates does only little to alleviate. A selective default will be easier to pursue.

The outlook for Greece

There is a lop-sided character to the latest bailout, which still leaves the position of the Greek economy in grave difficulty. While it is estimated that there is a 21% cut in the face value of the bank’s Greek bond holdings, the benefit to Greece is much lower, just €26bn lower debt in by 2014 of a total of €350bn, or just over 7%.

The reasons for this are manifold; the Greek government will be expected to contribute to recapitalisation of Greek banks who will be caught in the default. It will also be expected to pay very large sums for wholly pointless ‘credit enhancements’ simply to protect the dignity of the ECB, which will then maintain the fiction that the Greek bonds it receives as collateral are not in default. There will also be privatisations which will reduce the revenue streams for the Greek state without reducing the debts of the state-owned enterprises.

It is highly doubtful that even a 21% reduction in the Greek debt burden would be sufficient to prevent further crises. If a 7% reduction in the actual debt burden were sufficient, there would never have been a crisis at all. The main problem remains the hobbling of growth in the Greek economy, which is itself directly caused by the imposition of swingeing cuts in public sector spending.

The Summit statement refers to an EU Task Force to promote ‘competitiveness and growth, job creation and training’. But this is to be done from existing structural fund transfers to Greece. No doubt these could be better deployed, with studies suggesting that these funds have the lowest effectiveness in Greece of all the Euro Area economies. This is because among the Euro Area countries or regions in receipt of structural funds, Greece is by far the least integrated into the world economy, with external trade accounting for just 25% of its GDP.

But it seems there will be no new money to raise the productive level of the Greek economy. Worse, EU neo-liberal economic policies mean that a commitment to competitiveness and growth is usually a recipe for privatisation and deregulation, including the removal of legislation protecting workers’ rights and pay. These will tend to exacerbate the downturn in the economy. As a result, this is very unlikely to be the last Greek bailout and the Greek crisis is not over.

The same can be said of at least Ireland and Portugal, who only benefit directly from the cut in interest rates, saving perhaps €1bn in interest costs compared to public sector deficits of approximately €18bn and €14bn respectively.

Structural reform

The bitter infighting between European governments and institutions obscures some fundamental facts about the crisis. The first is that there is no need for any crisis at all. The immediate cause of the crisis was the inability of the Greek government to both meet its expenditures and to redeem its existing debt obligations as they fall due. Of the two, the latter is by far the larger burden on state finances. But even in Greece there is ample scope to finance these commitments from domestic resources alone.

According to Word Bank data, Greek businesses contribute just over 37% of all tax revenues in the form of taxes on profits, capital gains and investment income. By contrast income taxes levied overwhelmingly on the poor and middle earners plus consumption taxes account for 50% of total tax revenues. But the proportionate income shares of value created are reversed, with by far the greater share accruing to capital rather than labour. Greek profits are taxed at half the rate of Greek wages. The Greek budget deficit this year will be approximately one-fifth of those profits. Yet in all of the €10.2bn in spending cuts and new taxes, barely a cent will be raised by the imposition of taxes on businesses.

Even so, Greek businesses complain they cannot compete with European rivals. They are correct. In common with the other crisis-hit countries of Ireland and Portugal, despite being highly exploitative and lowly taxed, the domestic bourgeoisie is too weak to compete in the international markets. Their limited integration in the world economy is increasingly driven by multinationals, not by domestic capital. Greece, Ireland and Portugal require a thorough reversal of the tax system and a significant increase in investment. Without the state taking control of the banks and major large scale industries it is doubtful that domestic resources could fund both.

Therefore EU transfers are currently required to plug the shortfall in investment as well as to cover the deficit. This points to the structural weakness of the EU as a whole. The crisis-hit countries are simply symptomatic of the structural inability of individual economies to cope with inflexible exchange rates and common interest rates without fiscal transfers.

As the pressures on Italy show, the whole of the EU project can unravel and bring about the demise to the third-largest economy in the Euro Area. Chancellor Merkel has set her face against a ‘fiscal transfer union,’ akin to the tax and payments relationship between the US states and the federal government. But this is precisely what is required to prevent further crises.

Postscript on Britain

The ruling ideology in Britain is ‘Eurosceptic’ and is expressed in differing degrees across classes. At root this represents the combined interests of the Atlanticist wing of the British ruling class and the specific interests of the City of London. It too has just undergone a major reversal.

Almost as one, the cry recently went up in Britain that Greece should leave or be expelled from the Euro Area. It was first voiced by Boris Johnson, perhaps the British politician most closely connected on a day-to-day basis with banks based in London. It was quickly followed by similar sentiments from David Cameron, George Osborne, Jack Straw as well as many who consider themselves to be on the Left. It was almost certainly initiated by British banks who had nothing to lose and sought (at least) competitive advantage from a Greek default and devaluation.

But the Chancellor performed a remarkable volte-face when faced with the possibility of the crisis spreading to Italy. He told the Financial Times on July 20, that the latest bailout ‘was only the first step towards a necessary fiscal union in the single currency area.’ The FT added, ‘He recognised that his enthusiasm for greater eurozone integration turned British policy on its head, since it ends the government’s long-standing desire to frustrate the creation of a two-speed Europe. He said “the remorseless logic” of monetary union was greater fiscal union.’

The infantile urgings of the British ruling class for a Greek default ended abruptly when they looked over the abyss. An Italian default could only have been preceded by those of Greece, Ireland, Portugal and probably Spain too, with British bank loans of approximately US$350bn at risk – US$135bn in Ireland alone.

As a result, the majority of the British ruling class is now swung to federalism, at least for the Euro Area itself – a belated recognition of reality and an end to wishful thinking. Expect most other forces to fall into line as result, with only the diehard anti-European reactionaries holding out.