Europe faces a protracted period of austerity, with major contractions in output, consumption and employment. The crisis has started with the smaller, more vulnerable economies like Greece, Portugal and Ireland. But the others will follow, starting with Britain. [Part one]
Europe faced with a downward spiral
Some crises can be solved with reforms, which do not go beyond the established limits. This is above all the case after a long period of economic growth when capitalism has accumulated a layer of fat. It can use its accumulated reserves to prevent the crisis from developing into a deep slump.
In the recent crisis, the ruling classes of the world, beginning with the USA, was frightened at the social and political effects of a slump, and took extraordinary measures to prevent it. From the standpoint of orthodox capitalist economics these measures were completely irresponsible.
These measures had a certain effect, but did not solve anything fundamental. On the contrary, the huge levels of government debt caused by the bail-outs are a finished recipe for new and even more severe crises of an economic, social and political character.
Long ago Ted Grant predicted that in the event of a deep crisis, the bourgeoisie would use their accumulated reserves, and this is just what has happened. Over a period of more than half a century the capitalists have accumulated a layer of fat that could be used to prevent a deep slump from taking hold. But these reserves are rapidly being used up, and now the governments of the western world have been obliged to resort to the policy of deficit financing to prevent a total collapse. The result has been the creation of new and insoluble contradictions in the form of deficits that have no historic precedent in peacetime.
In the period following World War Two, in 1945-7, the USA financed European capitalism to the tune of $200 billion (in modern money). But in the first two years of the present crisis, the US government underwrote the banking system by $800 billion, and Britain (a far smaller economy) handed over $400 billion – twice the total amount of Marshall Aid. This situation cannot be sustained. The options of the ruling class are severely limited. Interest rates are close to zero, and cannot be further reduced to stimulate borrowing.
The huge debts left over from the previous period still have to be repaid, which will inhibit consumption and slow the recovery in Europe and worldwide. The recourse to “quantitative easing” is a desperate measure, which, if it continues, will lead to a combination of stagnation and inflation (“stagflation”). Thus, the capitalists will end up with the worst of all worlds.
The viability of the “rescue” package launched by the bourgeoisie in Europe depends on the implementation of brutal austerity measures. Failure to carry these out could lead to cutting off the cash, which is approximately the same as cutting off the vital supply lines that keep a critically sick patient alive. Even if it the plan were to “succeed” it would leave Greece with an intolerable public-debt burden. This so-called rescue means years of painful austerity for the people of Greece, without giving other countries any relief.
If there is a default in Europe, it will be accompanied by a massive contraction of consumption, which can drag the whole world economy back into recession. It will affect the USA and Asia. None of the contradictions has been eliminated. A new commercial real estate crisis is being prepared in the USA. Some say it might be due this autumn. This involves 6.7 trillion dollar, whereas the last sub prime crisis "only" involved 1.3 trillion. It could drag the whole financial system down into a complete collapse.
Fears are growing of a double-dip recession. The Chinese leaders are also worried. The Chinese spent massively to avoid recession but this has created new and insoluble contradictions. China has built up a colossal productive power, which cannot be absorbed by its internal market. If demand shrinks in Europe and the USA, where are they going to export? And since China has been the main engine of global growth as the world struggled to emerge from recession, a sharp slowdown in China could deal a heavy blow to the world economic recovery.
What future for Europe?
The euro and the European Union will probably survive this crisis because the consequences of a break-up would be very serious for all. Nevertheless, the crisis is so deep, and the confidence of the bourgeois so shaken, that some of the bourgeois strategists are beginning to contemplate the unthinkable. George Friedman wrote on the intelligence website Stratfor on May 25, 2010:
“We return to the question that has defined Europe since 1871, namely, the status of Germany in Europe. As we have seen during the current crisis, Germany is clearly the economic center of gravity in Europe, and this crisis has shown that the economic and the political issues are very much one and the same. Unless Germany agrees, nothing can be done, and if Germany so wishes, something will be done. Germany has tremendous power in Europe, even if it is confined largely to economic matters. But just as Germany is the blocker and enabler of Europe, over time that makes Germany the central problem of Europe.”
If the EU were to break up, where could Germany look? The obvious answer would seem to be France. But historically, France and Germany have been rivals, and even in the context of the EU this rivalry continued, with France aspiring to the political and military leadership of Europe, consigning to Germany the economic primacy. Unfortunately for France, economic power is always decisive in the last analysis.
France’s interests look southwards – towards the Mediterranean, the Middle East and North Africa. Germany, by contrast, looks east – to Central and Eastern Europe, the Balkans – and Russia. That is where Hitler looked forLebensraum. What he failed to do by military means, the German capitalists hope to do by economic means. It is not ruled out that Germany in the future will expand its contacts with Russia, which represents a vast potential field for markets and investments, raw materials and cheap labour. But this could only be achieved by subordinating Germany to Russian interests. This would be bitterly resented by Washington and the rest of Europe, especially Poland.
The unification of Europe is a necessary task if Europe is not to enter into a path of slow and inglorious decline, as happened to imperial Spain from the 17thcentury onwards. It is a historically inevitable task, which capitalism has posed but is totally incapable of solving. Only the Socialist United States of Europe could succeed in radically abolishing the old frontiers and unite all of Europe, include Russia, the Ukraine and Turkey. It would be able to mobilize the colossal productive potential of what is, in fact, Eurasia, uniting the vast natural resources and agriculture of Russia and the Ukraine with the industries of Europe.
Robbing the poor to pay the rich
In 1939 the capitalists found a way out of the crisis through war. But this avenue is now closed. There is no question of Europe waging war against the USA, for example, or of conquering Russia (as Hitler attempted), still less of conquering China. Europe, despite its colossal potential, remains weak and divided, as the tiny Greek city states were divided in Antiquity, when they ended up under the domination of Rome.
The Marxist tendency pointed out long ago that the coming period will be a period of wars, revolution and counterrevolution. The recent upheavals in Iran, Kirghizstan, and Thailand, on the one hand, and Iraq, Afghanistan and Gaza, on the other, show the correctness of this assertion. There is colossal instability at all levels: economic, financial, social, political and military.
For reasons we have explained, a world war is ruled out at the present time. But there will be many small wars: wars over markets and natural resources, especially oil. This can be a source of international or national conflict, which inevitably leads to higher military spending. The bourgeoisie of all nations are preparing for the future by arming to the teeth.
Under these circumstances, the ruling classes of Europe have no alternative but to attack the working class. For the last half century, they bought social peace by granting reforms. But this option is no longer available to them. From the standpoint of the capitalists, not only can they not afford any new reforms: they cannot afford to maintain the reforms that were won by the working class over the last fifty years. In order to maintain their profits, they must destroy all these reforms, which the workers have come to regard as natural.
In reality they are not natural, but the product of decades of class struggle. It is worth remembering that democracy itself was only achieved through a long and bitter struggle. The ruling class, which now often speaks of its commitment to democracy, was opposed to each and every democratic advance. And like every other gain that was won through struggle, the democratic rights of the workers are under threat, beginning with the most important rights: the right to strike and demonstrate.
In the last period the capitalist system went beyond its limits. The unbridled expansion of credit (and consequently, of debt) has pushed world capitalism into an abyss of debt from which it is now striving to extricate itself. But in so doing, it has created new and indissoluble contradictions. The central contradiction is that the European working class is now a thousand times stronger than it was in the 1930s.
The peasantry, the main social reserve of reaction, has been practically eliminated. In Italy, Spain and Greece, the peasants were a majority and even in France and Germany they were a sizeable force not so long ago. Now they are a tiny minority and the working class is a decisive majority. The workers’ organizations are intact and have not suffered a decisive defeat since 1945. The students, who in the 1930s were a recruiting ground for fascism, have moved to the Left and are a now a recruiting ground for revolution, as they were in Tsarist Russia.
Given this correlation of class forces, the bourgeoisie regards the prospect of an all-out conflict between the classes with dread. But they have no alternative. The perspective is of a weak recovery, accompanied by high levels of unemployment and ferocious attacks on the living standards of the workers and middle class, the unemployed, the old and the sick. The poorest sections of society will be compelled to pay the bill for the crisis of capitalism. This fact, in itself, will have profound consequences.
For a whole historical period the bourgeoisie has had to base itself on the support of the reformist leaders of the unions and mass workers’ parties. But in the end, this basis will not be reliable. The crisis of capitalism is also the crisis of reformism. For decades the social base of reformism in the labour movement has been strengthened at the cost of the revolutionary wing, which has been weakened and isolated. Workers are practical people. If, as the reformists assured them, it was possible to achieve what they wanted under capitalism, then why go to all the pain and trouble of revolution?
These arguments carried weight as long as the reformists delivered the promised results. Reformism with reforms makes sense. But reformism without reforms, reformism with counter reforms, makes no sense at all. This is the lesson that the Greek Prime Minister Papandreou is learning, to his cost. The Greek workers voted massively for the Pasok in the last elections, because they hoped that the Socialists would protect their living standards. But the depth of the crisis of Greek capitalism ruled this out.
Despite their intentions, Papandreou and the other leaders were compelled to take drastic measures, not to protect the living standards of the Greek workers and middle class, but to save Greek capitalism. The two things are mutually exclusive.
Papandreou has promised to push through cuts totaling 45 billion Euros to reduce the budget deficit by an unprecedented 11 percentage points of GDP, to below the EU ceiling of 3 percent. But already there are suggestions that the planned deficit cut of more than 20 billion Euros in 2010 is too ambitious. In the context of an economic contraction of about 4 percent, this is the country's deepest recession since 1974.
Deep cuts in public spending will make things worse by reducing demand and causing a fall in tax returns. The increase in VAT and public sector pay cuts adds up to an estimated 10 percent loss in purchasing power. This hits small businesses hardest. About 60,000 small businesses are expected to shut down by the end of the year - around a third of the total. This will mean less income from taxes, not more, as the government claims.
Fuel tax increases, which have boosted the price of unleaded gasoline by 36 percent to 1.52 Euros a liter since February, have shrunk sales volume by up to 15 percent. On the other hand, with the collapse of construction, Greek unemployment rose to 12.1 percent in February, the highest monthly level on record and above an average 2010 estimate of 11.8 percent envisaged by the bailout plan. Higher unemployment will force the government to spend more on benefits than expected. And earnings from tourism receipts, Greece's biggest source of foreign currency, are set to shrink for a second consecutive year, by up to 15 percent.
Papandreou’s chances of actually implementing his austerity policy are therefore close to zero. In the end, no matter how much pressure is applied on the people of Greece, they will never be able to pay their debts. The so-called “aid” can only postpone the Day of Judgment. And the merciless pressure from Brussels to slash living standards, and therefore reduce demand, will only succeed in pushing Greece further along the road to national bankruptcy and default.
The threat of a chain reaction, beginning in Greece, that could drag the whole of Europe into a downward spiral, still hangs over Europe. One country after another will be pushed over the precipice, starting with the weakest ones. The rest, with a greater or lesser delay, will follow. The strategists of Capital are aware of the danger. An article by Thomas F. Cooley, professor of economics and dean of the NYU Stern School of Business, on 2nd June bore the title: This Greek Tragedy Is Only Beginning. In it he writes:
“For the next several years Greece will face a huge drop in output and consumption. The magnitude of the drop in Greece will dwarf the U.S.'s experience in its recent recession. It will take years for consumption levels to return to anything close to pre-crisis levels. Wages will fall, and access to capital markets will be limited. Greece will be forced to restructure its debt. Several of the other debt-burdened economies in Southern Europe will face similar, painful adjustments.” (This Greek tragedy is only beginning, Forbes.com)
Portugal is a small economy, accounting for only 2% of euro-zone output and public debt. Before they turned their attention to Spain, the bond markets seemed to judge Portugal as the next weakest link in the euro zone chain. Portugal’s bond yields jumped to 5.7% on May 5th, an increase of 1.6 percentage points since the start of the year. Its public debt reached 77% of GDP last year. This is about average for Europe, but its budget deficit was 9.4% of GDP – a very high figure.
Portugal relies heavily on foreign capital and so is vulnerable to market bullying. Its net international debt rose to 112% of GDP in 2009, after a run of huge current-account deficits. About half of this is public debt; part of it is direct investment in big firms; but a large portion, some 46% of GDP, is channeled through the banking system.
Lisbon protests that Portugal has scrupulously observed the euro-zone’s fiscal rules, cutting its budget deficit from 6.1% of GDP in 2005 to 2.8% by 2008. Public-sector jobs have been cut by 10%. In 2006 the Portuguese held down real increases in pensions at a time when the economy was still growing rapidly, and relaxed the rules on hiring and firing.
These are the same kind of policies that the markets are demanding in Spain and Greece. But this was all to no avail. For every step Portugal takes to satisfy the markets, the latter demand three more. Portugal has been warned that if it is to refinance its existing debts at tolerable interest rates, it must lower the cost of public borrowing. That means it must undertake far more drastic action to cut the budget deficit.
The fall in the euro as a result of the crisis ought to help Portugal sell more in Angola, Brazil, China and America. But a rise in Portugal’s exports can only be at the cost of other capitalist economies. In the end, the government will have no alternative but to launch an attack on living standards. It has already pledged to cut unemployment benefit. Public pay could be frozen. Big transport projects could be scrapped and state-owned firms can be sold off to satisfy the implacable demands of the Men of Money.
This means that all the gains of the Portuguese Revolution of 1974-5 will be liquidated. But such a counterrevolution cannot take place without arousing fierce resistance from the Portuguese working class, which has never forgotten the revolutionary traditions that burst to the surface in those glorious days. At that time it would have been possible to have carried through the socialist revolution in Portugal, and this could have been accomplished peacefully.
The London Times in 1975 published an editorial with the title: “Capitalism in Portugal is dead.” This ought to have been the case. If it was not, the fault was not of the Portuguese working class, which behaved admirably. The fault was with the leaders of the Socialist and Communist Parties who were not prepared to take power when they could have done so. As a result, the bourgeoisie succeeded in containing the movement and reasserting its power.
For three decades the movement in Portugal has been pushed back. But as Marx explained, the Revolution requires the whip of the Counterrevolution. The attempt by the bourgeoisie to liquidate all the gains of 1974-5 will arouse the Portuguese workers and youth. Already there have been mass demonstrations on the streets.
The minority Socialist government has passed its economic programme (the PEC), but it needs the support of the right wing PSD and CDS to carry out an austerity policy. The working class has already reacted with mass demonstrations, beginning with May Day, when 130,000 demonstrators came onto the streets of Lisbon. This was followed up by another mass demonstration of 300,000 against austerity 29th May, mainly organized by the Communist Party, but also Bloco de Esquerda and the trade unions, above all the Communist-controlled CGT-In.
The crisis in Spain
Spain is a much bigger problem for Europe than Greece. It is Europe's fifth-largest economy, and if it follows Greece into a debt crisis the effects will be felt throughout Europe and beyond. The International Monetary Fund has warned that the Spanish economy needs "far-reaching and comprehensive reforms" of its labour market and banking sector.
In the last few years Spanish capitalism went up like a rocket and is now falling like a stick. More than any other country in Europe, the Spanish capitalists threw themselves into the orgy of speculation with merry abandon. As a result, the collapse of the housing market has hit Spain harder than anywhere else.
The Spanish economy had the fastest growth rate in the EU, but has been in recession for nearly two years, and in the first quarter of 2010, grew by only 0.1 per cent. The economic collapse is reflected in the frightful level of unemployment, which stands (officially) at 20 per cent – the highest in Europe (except Latvia) and one of the highest of any developed capitalist country. The deficit soared to 11.2 per cent of GDP. Zapatero wishes to reduce it to 9.3 per cent this year, 6 per cent next year and 3 per cent by 2013.
Zapatero wanted to avoid a clash with the unions, but under pressure from Brussels and the White House, he has made an about-turn, announcing a programme of painful measures which are supposed to save €15bn over two years.. "We need to make a singular, exceptional and extraordinary effort to cut our public deficit," he said. Barack Obama made a personal telephone call to Zapatero the day before his announcement to discuss the importance of "Spain taking resolute action as part of Europe's effort to strengthen its economy and build market confidence.”
This “exceptional and extraordinary effort” includes a 5 per cent pay cut for Spain's 2.5 million public sector workers this year, scrapping the €2,500 (£2,100) "baby cheque" for new mothers and a €6bn cut in public investment. Spaniards living on the minimum pension have seen their cost-of-living increases cancelled, and there will be cuts to state medical expenditure, payments to people caring for elderly parents. The plan also includes cuts to regional governments.
The fact that the American President had to ring Madrid shows the deep concern in Washington over the parlous state of the European economy, and the fears that the crisis in Europe will have the most serious consequences for the United States. Brussels welcomed the cuts promised by the PSOE government. The European Commissioner for Economic and Monetary Affairs, Olli Rehn, said that the measures "seem to go in the right direction" and that he expected similar announcements soon from Portugal.
EU Competition Commissioner Joaquin Almunia, a former leader of the PSOE, called the cuts "a logical step" that is necessary "to avoid greater evils in the financial markets and emerge from the crisis sooner". Thus, Washington and Brussels loudly applaud the fact that a “socialist” government is prepared to do the dirty work for them. Despite this, however, the right wing PP is attacking the PSOE and voted against its economic package.
Up till now Zapatero has avoided the type of unrest that has brought thousands on to the streets of Athens because he managed to preserve social benefits and protections in the face of repeated calls by economists and business leaders for “labour reform”. However, the austerity package has angered the unions. In an attempt to placate his base, the Socialist Prime Minister stressed that despite the new austerity measures, "the pillars of the welfare state will remain untouched". This is the same song that is being sung by governments all over Europe. But it does not make any sense.
"The behaviour of the trade unions has been and is impeccable during these times of crisis and will continue to be so, but [Zapatero's] announcement is a turning point," Ignacio Fernandez Toxo, president of the CCOO, has said. The union leaders were desperate to avoid a confrontation with the government. But the union leaders can only keep the unions in check if the government and the bosses offer them something in return. But nothing is being offered except cuts. Therefore, the union leaders are compelled to mobilize.
Until now there has been a low level of strikes because the suddenness of the economic collapse and the onset of high unemployment temporarily shocked the workers. This was entirely logical and was foreseen by the Marxists in advance. We had to explain this to the ultra left sectarians who, in Spain as everywhere else, imagined that the economic crisis would lead immediately to a wave of strikes and general strikes. Now a general strike is on the order of the day, not only in Spain but in other European countries. A national strike of civil servants has been called for 8 June and there is talk of a general strike.
The PP leaders have attacked Zapatero for letting the economy deteriorate to the point that Washington and Brussels had to push him into action. They are putting party interests before that of the general interests of the bourgeoisie. This fact is a reflection of the deep gulf between the classes in Spain, which was papered over by the Transition, but which has emerged once more. Even before the economy collapsed, the right wing had taken to the streets under the banner of the Church, using the kind of language not heard since the days of the Franco dictatorship.
As always, the reformists are preparing the victory of the right wing. The PSOE is losing ground in polls against the conservative Popular Party, despite a corruption scandal involving opposition leaders. According to the polls, the People’s Party would win an outright majority in parliament if elections were held now. But a PP government would face a radicalized labour movement. It would be a government of crisis, which probably would not last long and would only serve to deepen the polarization between the classes.
The crisis has exposed the deep fault lines that underlie Spanish society and politics, which were papered over, but not abolished, by the so-called “Transition” from the Franco dictatorship to “democracy”. In the next period these fault lines will open into an unbridgeable abyss between the classes.
The whole situation is beginning to change. Spain faces a period of heightened class struggle in which the workers will rediscover the traditions of the 1930s and 1970s. By implementing a policy of cuts, Zapatero has capitulated to the bourgeoisie. This is producing a mood of disillusionment among those workers who had changed their vote from the United Left (IU) to the PSOE in the last period, in order to block the advance of the right wing and because the IU leaders were offering no serious alternative.
Now that process will go into reverse. Through experience, militant workers will come to understand the limitations of economic strikes and turn to politics, and radicalized youth will look for the banner of Communism. Despite all its deficiencies, the IU will increase its vote and begin to pick up new members from the most radicalized layers of society. The audience for genuine Marxist ideas will grow irresistibly.
In Italy Berlusconi has just passed an austerity bill off 24 billion euros of cuts over two years. The ruling right wing coalition plans to freeze the wages of public sector workers. The age of retirement for women workers in the public sector will be raised to 65. Ten billion Euros will be cut from the local administration, which will force local councils to carry out deep cuts in social spending: schools, health etc.
Berlusconi won the elections thanks to the bankruptcy of the Centre Left and only maintains itself in power for the same reason. The Democratic Party shows itself to be completely impotent to take advantage of the crisis of the Berlusconi government. But the latter now has to preside over a programme of vicious cuts. The Italian capitalists are supporting the present package but want the government to go much further. The pressure from Confindustria is aggravating the splits within the ruling coalition.
The impotence of the Left means that all the attention of the working class is concentrated on the unions. The union leaders, as in other countries, are no more inclined to conduct a serious struggle than the leaders of the political “opposition”. At its national congress, the CGIL decided that it was not the moment to lead an offensive against the government. But they were forced by pressure from below to call a four hour general strike in June.
This is an early anticipation of how things will develop. The defeat of the Centre Left Coalition caused disappointment and disorientation in the working class. But this mood will not last long. The impotence of the “Left” opposition and the vacillations of the union leaders will not prevent the radicalization of the Italian workers. Beginning in the public sector, there will be a series of strikes and demonstrations, which will transform the whole situation.