High stakes in deepening European crisis

Source: Eurostat
Youth unemployment rate in EU - 23.5%

By Nicky Dempsey

Repeated claims that the European crisis is over are entirely false. Among the countries whose creditors have been bailed out the Greek economy is expected to contract sharply again in 2013, the Portuguese centre-right coalition government has threatened to fall apart and Ireland, long touted as the model for a bail-out, has officially gone back into recession.

The basis for the persistently incorrect assertions that the crisis is over is the reassurances provided to creditors of the indebted economies by the European Central Bank. Public discussion on all economic matters is increasingly dominated by banks and other financial institutions. As far as they are concerned, assurances that the ECB would ‘do whatever it takes’ to prevent further defaults means that the crisis is over. For finance capital the European economic and social crisis is reduced to a crisis of debt repayment.

In reality the Euro Area economy continues to contract under the impact of austerity measures and unemployment continues to rise. In the latest forecasts from the IMF, one of the three key members of the Troika, cut its GDP growth forecast for the Euro Area to -0.6 per cent in 2013.

There are now over 25.5 million people unemployed in the European Union as a whole and unemployment has reached over 23 per cent for the under 25s. In Portugal and Italy youth unemployment is 40 per cent, while in Spain and Greece it is over 50 per cent.

Against this backdrop the Greek government has been wrangling with the Troika because the latter’s economic prescriptions are leading to a wider deficit, while there is infighting among the Troika over the provision of funds already earmarked for Greece’s creditors. The agreed price for release of those funds is further cuts in public sector jobs.

The cause of political crisis in Portugal was the fall-out from a sharply rising deficit and the strong likelihood than another bailout will be required.

In Ireland the economy has never really got out of recession at all. The continuing economic crisis is decimating the Labour vote as it implements austerity as well as supporting the continued rise of Sinn Féin, which has developed a clear alternative to government policies.

There had been repeated assertions that Portugal and Ireland would soon be released from the Troika programmes and be able to return to borrowing from the bond markets. But the renewed turmoil in global financial markets caused by US capitalism’s adjustments to its own lower growth have pushed global borrowing rates to levels that are unsustainable for both Portugal and Ireland.

In Greece, government borrowing costs have never fallen far enough for anyone to suggest the economy could escape the clutches of the Troika.

Instead the continuing crisis is likely to raise renewed concerns about the stability of the Spanish and other banking systems, or even that Italy might face a funding crisis. These economies are so large and the financial problems so severe that they would exceed the level of funds that the Troika are willing to commit to bailouts. The EU has already retreated from providing the necessary funds for further bailouts of banks, but insists that national governments must bail them out.

As a consequence, the European economies are being increasingly hollowed out in order to prop up banks. Taxpayers have already been burdened with the costs of bailouts and further bailouts are likely. In addition, so-called ‘bail-ins’ are increasingly the norm, taking the form of raiding the savings held as bank deposits or in bank bonds. This has occurred on a grand scale in Cyprus and with Bankia in Spain, and with the Co-op Bank in Britain.

The deepening crisis is increasingly reaching into the so-called core countries. The economies of both France and the Netherlands are forecast to contract this year. Germany may only narrowly avoid recession. The IMF is forecasting just 0.3 per cent German growth for 2013. The motor of the German economy is industrial production, which has fallen in the first five months of this year.

The global economic crisis has exposed the fault lines in the Euro and austerity has deepened them. The widespread optimism that the crisis was over is entirely misplaced, based on nothing more than the self-interest of the banks.

For all the capitalist economies a resolution of the current crisis requires a radical reorientation of economic policy. The depth of the crisis and the existence of the Euro mean that for Europe the stakes may be even higher.