Fight Racism! Fight Imperialism! 225 February/March 2012

Nearly $6.3 trillion was wiped off global stockmarkets in 2011 under the impact of the eurozone financial crisis. Political divisions within the eurozone over managing the debt crisis remain unresolved. On 9 December British Prime Minister David Cameron dramatically vetoed a proposed European Union (EU) treaty change to impose greater fiscal discipline throughout the eurozone. The downgrading of France’s and Austria’s AAA top credit rating by agency Standard & Poor’s (S&P) a few days later added to the turmoil. Negotiations on the write-down of Greek debt have stalled, bringing ever closer the prospect of a Greek sovereign debt default. Christine Lagarde, managing director of the IMF, warned that the world faces the risk of economic contraction and rising protectionism reminiscent of the 1930s unless serious measures are taken to resolve the crisis. DAVID YAFFE reports.

Ten days to save the euro

At the end of November 2011 Olli Rehn, EU economic affairs minister, had warned that there were ten days to save the euro or face the disintegration of the EU. The choice, he said, is between greater integration and the EU falling apart. This warning came after central banks took coordinated action to avert a fresh credit crunch – commercial banks not lending to each other – by slashing the price of short-term dollar loans to commercial banks from 1.1% to 0.6%, and extending the scheme until February 2013. The ‘ten days’ referred to an EU summit on 8-9 December, at which the dominant eurozone countries would argue for a treaty change to allow deeper fiscal union, closer coordination and direct supervision of national economic and budgetary policies of eurozone countries.1

German Chancellor Angela Merkel and French President Nicholas Sarkozy met in Paris on the Monday before the summit to finalise plans for EU treaty change. Cameron had told Sarkozy on the previous Friday that he would not block those treaty changes. However, the UK would demand concessions if the proposed amendments affected all 27 EU countries, including those outside the eurozone. Cameron was under increasing pressure from the eurosceptics in his party. MPs on the right of the party met the night before the EU summit to discuss tactics after Owen Patterson, the eurosceptic Northern Ireland Secretary, challenged Cameron by arguing that any revision of the EU Lisbon Treaty would have to be put to the British people in a referendum. Patterson’s call was supported by London’s Tory mayor Boris Johnson. Cameron made it clear that his first concern was to resolve the eurozone crisis: ‘The British national interest absolutely means we need to help resolve this crisis in the eurozone. It’s freezing the British economy, just as it’s freezing economies across Europe’ (The Guardian 8 December 2011).

Cameron isolated in Europe

France and Germany rapidly reached an agreement on new fiscal rules to bring to the summit to enforce budget discipline and debt control in the eurozone. The treaty changes necessary to accommodate these measures had to be agreed by March 2012. Merkel and Sarkozy made it clear that if it proved too difficult for all 27 EU states to reach agreement they would opt for a new agreement among the 17 eurozone countries. This was a warning to Cameron that he should moderate his demands or be bypassed.

Nevertheless Cameron continued to insist that any such treaty change had to include a separate protocol to protect the City of London from excessive EU regulation. Further, the changes should not distort the single market covering all 27 EU states. In addition he wanted an agreement that the European Banking Authority would remain in London, and that City-based US financial institutions that do not trade with the rest of Europe would be protected from regulation. Finally he wanted a written guarantee that any proposal involving ‘user charges’ for financial groups, including any variant of the European financial transactions tax, should have unanimous agreement (Financial Times 9 December 2012).

Cameron was hoping to exploit differences between Merkel and Sarkozy. Merkel favours an agreement of all 27 EU states to revise the Lisbon Treaty. Sarkozy prefers to limit the new treaty to the 17 members of the eurozone. However they are united in ensuring that Britain should not secure special status for the City of London. So at the EU summit, when it became clear that Britain would veto any revision of the EU Treaty, negotiations entered a second phase: for a new pact, to be agreed by the 17 eurozone states and any other EU states that wanted to sign up, in a new legal framework outside the judicial and institutional framework of the EU. Britain was isolated as all other nine states outside the eurozone wished to continue the negotiations.

The agreement embodies a new fiscal pact to enforce budgetary discipline. This includes a balanced budget – an annual structural deficit of no more than 0.5% of GDP with automatic sanctions against countries that breach a 3% GDP deficit limit, unless a qualified majority decides otherwise. Private sector bondholders will not be forced to take losses in future eurozone bailouts. The European Court of Justice will ensure compliance, and there will be stronger EU surveillance and assessment of non-complying states.

The €440bn European Financial Stability Facility (EFSF) bailout fund is to be rapidly deployed and leveraged through an insurance scheme on bond losses; the European Stability Mechanism (ESM), the new €500bn fund to be launched one year earlier than planned in July 2012, will replace the EFSF by mid-2013. There is, as yet, no agreement to run the two funds simultaneously but this will be reviewed in March 2012. Finally the eurozone and other EU countries are to lend an extra €200bn to the IMF (Financial Times 10/11 December 2011). The overall agreement reveals the neo-liberal agenda of the dominant European imperialist countries in the eurozone.

Cameron is isolated in Europe; he also faced serious criticism at home. City leaders said that his attempt to protect the City of London had backfired, weakening the UK’s negotiating position at a time when the EU was issuing new financial services directives. This was confirmed when Olli Rehn made it clear that the City of London would be subject to new regulations from Brussels. Divisions in the Coalition government rapidly emerged. Deputy Prime Minister Nick Clegg said the rift with Brussels could leave Britain ‘isolated and marginalised’. ‘I hear talk about the “bulldog spirit” … There’s nothing bulldog about Britain hovering somewhere mid-Atlantic, not standing tall in Europe, not being taken seriously in Washington (Financial Times 12 December 2011).’ Coalition Energy Secretary Chris Huhne told the Prime Minister in a cabinet meeting that he had no Coalition authority to veto a revision of the Lisbon Treaty. Labour Party leader Ed Miliband called Cameron’s European policy an ‘act of vandalism’ that left the City of London ‘marginalised’.

Five years ago, we said:

‘How long the British economy can sustain itself outside Europe, with Britain becoming more and more dependent on the parasitic dealings of the City of London, remains to be seen. The British ruling class knows that sooner or later it will have to make a choice with Europe or with the United States. Whatever choice is forced on the ruling class, it is certain that any independent role of the City of London will be severely curtailed.’2

The unfolding eurozone crisis clearly demonstrates the growing tensions within the British ruling class as it is confronted with this choice.

Britain was granted observer status at talks on the new eurozone fiscal treaty. Sections of the European ruling class, especially those supporting Merkel, want to continue to push for a 27-state agreement and try to win Britain over. In mid-January Cameron attempted to repair Britain’s relations with Europe when he joined Italian Prime Minister Mario Monti in working to deepen the European single market. Britain has allies in Jose Manuel Barroso, EU Commission president, and Olli Rehn who have argued that everything Germany wants in a new treaty could be achieved through normal EU legislative procedures, in which Britain would have its usual say (Financial Times 19 January 2012). However, at the end of January, Cameron attacked Germany for failing to contribute more resources and guarantees to resolve the eurozone crisis. He said the economic design of the eurozone was seriously flawed and the proposed financial transactions tax ‘madness’, demonstrating again the conflicting pressures placed on his government. Another EU summit is to take place on the 30 January and the new treaty agreement should be finalised in March.

The eurocrisis deepens

The eurozone debt crisis deepened in mid-January after S&P downgraded the credit rating of both France and Austria, two of the six AAA top-rated countries in the eurozone, as well as those of seven other eurozone countries, including Italy and Spain, which are not in the top tier. 14 countries in the eurozone were given a negative outlook; a one in three chance of further downgrading this year or next. S&P said December’s EU summit had not produced ‘a breakthrough of sufficient size’ (Financial Times 14/15 January 2012). Furious German politicians denounced the rating agency as part of an ‘Anglo-Saxon conspiracy’ against the euro. Merkel, however, used this development to demand the urgent implementation of the fiscal pact agreed in December.

On 16 January S&P downgraded the EU’s main bailout fund, the EFSF, by one notch from its AAA status, following the downgrade of two of the fund’s guarantors, Austria and France. On the same day David Lipton, a top IMF official, told the Asian Financial Forum in Hong Kong that without bold action: ‘Europe could be swept into a downward spiral of collapsing confidence, stagnant growth, and fewer jobs. And in today’s interconnected global economy, no country and no region would be immune from that catastrophe.’

Mario Monti entered the fray and appealed to Germany and other creditor countries to use their fiscal weight to help lower Italy’s borrowing costs as well as those of the other highly indebted governments, warning of a ‘powerful backlash’ among voters in Italy and in the eurozone’s struggling periphery if nothing were done. He said that the single currency had brought ‘huge benefits… maybe [to] Germany even more than others’ and that it was in Germany’s ‘enlightened self-interest’ to increase the bailout fund’s firepower (Financial Times 17 January 2012).

Negotiations over the write-down of Greek debt, necessary for the authorisation of the October 2011 EU/ IMF $130bn rescue fund for Greece, stalled in January. Hopes of a deal were set back when the IMF and Germany insisted that investors agree to lower interest rates on new long-term bonds. Private bond holders, including banks, insurers and hedge funds, were prepared to accept a 50% write-down of the debts, but insisted on 4% interest on the new bonds. Agreement is said to be close and negotiations continue. Without a ‘voluntary’ agreement on the write-down, Greece would be declared in formal default, throwing financial markets into crisis. As it is the rescue fund has to be in place before the 20 March deadline so that Greece can repay €14.4bn in debt and avoid a full-scale default.

Pressure is increasing on the dominant eurozone countries, particularly Germany, to increase financial support for the bailout fund or risk further downgrades and collapsing confidence. The IMF has told Brussels to drop its opposition to a larger rescue fund if it is to convince world money markets that the EU has the firepower to protect its vulnerable nations, warning that a failure of the euro would prompt a further global recession on the scale of 2008.

More austerity, unemployment and stagnant growth

The IMF has significantly cut its growth forecasts for 2012. World GDP is forecast to fall to 3.3% in 2012, down from the 4.1% forecast in September 2011. The GDP of the 17 eurozone countries is expected to decline by 0.5%, down from the 1.1% growth predicted in September. Italy and Spain will suffer two more years of recession in 2012 and 2013. Growth in the UK is forecast at 0.6% in 2012; a sharp fall from the 1.6% forecast in September.

Spanish unemployment rose to a record 5.3m at the end of 2011, 22.8% of the labour force, and is set to worsen as Rajoy’s right-wing People’s Party government pursues a €40bn (£33bn) budget adjustment, most of it in spending cuts, to meet the EU’s deficit target of 4.4% this year. 48.6% of all 16-24 year-olds in the country are jobless. Spain faces a spiral of decline. The IMF has already predicted that the economy will shrink by 1.7% this year, with a further decline in 2013.

Britain edged ever closer to a second recession, with the UK economy contracting by 0.2% in the last quarter of 2011. Production industries’ output decreased by 1.2%, construction by 0.5%, with the services industries stagnant. This leaves the British economy 3.8% below its pre-crisis peak. Chancellor George Osborne said that the government would not change its fiscal plans, arguing Britain’s economic problems were exacerbated by the situation in the eurozone. ‘I think we have got the right plan, we’ve got to stick to it’, he said. The situation can only get worse. Relative to the growth rate between 1997 and 2008, the Office of Budget Responsibility believes the level of GDP will be 18% lower by 2017. Unemployment in the three months to November 2011 (latest figures) reached 2.68 million, 8.4% of the workforce, with male unemployment at 1.56 million, the highest since 1995, and female unemployment at 1.3 million, the highest since 1987 – up 59,000 since August 2011. Unemployment amongst 16-24 year-olds reached 1.043 million, or 23.1%.

Living standards (real median household incomes) will fall a drastic 7.4% between 2009/10 and 2012/13, with the poorest 30% losing more than three times the richest 30%. Meanwhile it has been estimated that the average remuneration of senior staff in 2010 in the City of London was £1.8m. 2011 will be little different – Royal Bank of Scotland’s chief executive Stephen Hester was granted a bonus of nearly £1m on top of his £1.2m salary. Only public outrage eventually forced him to waive it. Since he joined the bank, 83% owned by the taxpayer, some 33,000 jobs have been cut. Nothing better illustrates the inequality that is a dominant feature of British capitalism.

Greece shows us the shape of things to come. Greece will be forced to take further austerity measures before instalments from the rescue fund will be disbursed, after an agreement with bond holders is reached. This will require further wage cuts, pension reductions and faster cuts in health care spending. Growth in 2011 is said to be revised down to –6% with a further decline of 3% expected in 2012. Already the impoverishment of the Greek people has reached such depths that parents are abandoning their children at nurseries, youth clubs and welfare institutions, saying they can no longer afford to feed them. As if this were not enough, a German government proposal, obtained by the Financial Times, wants Greece to cede sovereignty over tax and spending decisions to a eurozone ‘budget commissioner’ with priority given to servicing its debt. Such is the barbarity of capitalism.


1 See David Yaffe ‘European imperialism tightens its grip’, FRFI 224 December 2011/January 2012 for an earlier discussion of these issues. At

2 See David Yaffe ‘Britain: parasitic and decaying capitalism’ FRFI 194 December 2006/January 2007 on our website. At