Fight Racism! Fight Imperialism 228 August/September 2012

The narrow victory of the pro-bailout parties in the second Greek election on 17 June did little to calm the international financial markets as borrowing costs for loans to Italy and Spain, the eurozone’s third and fourth largest economies, swiftly rose again to unsustainable levels. International investors continued to retreat to what they regard as the safe havens of the US, German, and UK bond markets, where the yields on 10-year bonds reached record or near record lows.

The failure of the dominant European imperialist countries in the eurozone, particularly Germany, to offer a credible strategy for dealing with the debt crisis in Italy and Spain is generating panic throughout the international financial markets. DAVID YAFFE reports on the latest developments.

In Greece, within a week of the election, a coalition of pro-bailout parties, New Democracy (with 29.7% of the vote), Pasok (12.3%) and the Demo­cratic Left (6.2%), set about implementing the bailout agreement. This austerity and privatisation programme was demanded by the troika of the EU, European Central Bank (ECB) and IMF in return for further distribution of the funds from the second €130bn bailout package. Despite the threats and scaremongering directed at Greek voters by the troika, including ejection from the eurozone should they fail to vote for pro-bailout parties, Syriza, the coalition of radical left organisations opposed to the bailout package, significantly increa­sed its vote to 26.9% from 16.8% obtained in the 6 May election. Opposition on the ground to halting the austerity programme remains strong and committed.1

With the crisis in Greece relegated, for the present, to the sidelines, the dominant European powers now must rapidly find a credible response to the debt crisis in Italy and Spain. The deepening eurozone crisis is forcing the pace and Germany will have to accept significant moves towards a banking, fiscal and eventually political union in the eurozone, the essential underpinning of a strong and powerful European imperialist bloc.

Towards a federal Europe

In early June, the new French president François Hollande, with the support of the European Commission, had called for support for a ‘banking union’ to shore up the euro. This would require eurozone countries, backed by the financial power of Germany, to share the burden of their huge national debts and banking liabilities in return for surrendering sovereignty over their budget and fiscal policies to some central eurozone body. Four top EU functionaries were given the task of presenting proposals to an EU summit at the end of June.

Spain’s Prime Minister, Mariano Rajoy, desperately needing funds to support Spain’s failing banks, was reluctant to ask for a full-scale bailout because of the draconian and humiliating conditions that would be placed on his country by the troika, with the inevitable intensification of class conflict.2 Recognising this situation, Olli Rehn, the European commissioner for monetary affairs, called for consideration to be given to direct recapitalisation of banks, by breaking the link between ‘sovereigns and the banks’. He has the support of the French finance minister, Pierre Mosovici, who said that eurozone bailout funds should be used to inject cash directly into collapsing banks. Such direct payments are not permitted under existing EU rules. Bailout funds can only go to governments asking for a state rescue which can then use them to underpin their failing banks. Spain’s banks are thought to need in the region of €100bn to keep them afloat.

German banks are, however, resolutely opposed to a ‘banking union’ in Europe because they would be forced to support rivals in the weaker eurozone economies. In particular they are against any Europe-wide deposit guarantee schemes and are adamant that bank deposit schemes should be ring-fenced for domestic use. But pressure is building up on the German government to take a different stance.

The seriousness of the overall situation was expressed by the former German foreign minister, Joschka Fischer, when he warned that his country was at risk of destroying itself and Europe for the third time in a century and added that Angela Merkel, the German Chancellor, had months to change course and save the euro. The financier George Soros agreed, but added ‘Germany is likely to do what is necessary to preserve the euro – but nothing more’ (The Guardian 5 June 2012).

A recent analysis by the financial services group Credit Suisse argued that few eurozone banks would be left standing if the euro crisis results in the single currency bloc breaking apart. Some 58% of the value of Europe’s banks could be wiped out with the departure of the ‘peripheral’ countries – Greece, Ireland, Italy, Portugal and Spain. UK banks would not escape such a development with Barclays facing losses of €37bn and RBS €26bn. The IMF has estimated that €2 trillion of credit could be lost through a eurozone break-up. Given these scenarios, pressure continues to build up on the dominant European nations to come forward with viable solutions.

At the G20 summit in Mexico on 18-19 June Europe’s leaders came under intense pressure to act decisively and take steps to relax some of the austerity measures to boost economic growth. Talks on the opening day became fractious with the EU Commission president, Jose Barroso, making it clear that Europe had not come to the G20 summit to receive lessons on how to handle the economy. On being asked by a Canadian journalist why ‘North Americans should risk their assets to help Europe?’ he replied that: ‘This crisis was not originated in Europe… this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market.’

Matters clearly calmed down by the second day of the summit and it produced a commitment from the eurozone members of the G20, Germany, France and Italy, to drive down borrowing costs in the eurozone. Italy’s Prime Minister, Mario Monti, raised the possibility of using the eurozone’s rescue fund to buy the bonds of ‘peripheral’ countries on the open market. Merkel was non-committal about this in the formal session but, after discussions on the margins of the summit, she was ready to allow the eurozone’s bailout fund to be used for this purpose. It is understood the money would come from the €500bn European Stability Mechanism (ESM) and its predecessor, the €250bn European Financial Stability Facility (EFSF).

The arguments and tensions among EU leaders continued during the EU summit 28-29 June. On 28 June Reuters reported that Italy and Spain were holding up measures to promote growth throughout the EU until urgent action was taken to bring down their borrowing costs. This appeared to concentrate minds and the next day produced some decisions on both issues, as well as an agreement to produce a longer-term vision on the way forward to strengthen Economic and Monetary Union before the end of 2012, following discussion of a report presented to the summit (see above).

Eurozone leaders agreed to establish a single banking supervisory mechanism run by the ECB and, once this was created, to allow the ESM the possibility to inject funds into banks directly. Spain’s bank recapitalisation will begin under current rules, that is, the funds will initially be provided by the EFSF until the ESM becomes available. It was also agreed that EFSF/ESM funds can be used flexibly to buy bonds of member states that ‘comply with common rules, recommendations and timetables’. In addition EU leaders agreed to a €120bn growth-boosting pact to apply to all 27 member states. The markets responded positively, the euro/dollar exchange rate rose as did the prices of Italian and Spanish bonds (yields, and therefore borrowing costs, fell). This euphoria however was short lived once it became clear that nothing of note had been put in place to reverse the stagnant economic conditions existing throughout the EU and particularly those in the ‘peripheral’ countries.

After the summit Angela Merkel flew home to face a stormy meeting of the Bundestag, angry at the concessions she had made. She, however, insisted that German taxpayers’ money would not be committed to Spanish banks without strict conditions being imposed. She was true to her word. The Spanish government was given to the end of July to produce a credible two-year programme of structural reforms (spending cuts, tax rises, privatisations and measures in relation to the banks that would wipe out the savings of hundreds of thousands of Spaniards) as part of the terms of the eurozone rescue of its failing banks. In Greece the new government dropped plans to seek softer terms for its second bailout package, and is accelerating privatisations and struggling to put in place a further €11.5bn in spending cuts demanded by the troika, to ensure that the promised funds from the second bailout are forthcoming. There will be no let up in the desperate conditions facing millions of ordinary Europeans as the dominant European countries push forward their programme step by step to create a federal European imperialist state.

The City of London and the EU

The overall exposure of UK banks to debt in the so-called ‘peripheral’ countries in Europe amounted to some £195bn at the end of 2011, down 13% on the previous year. While this is considerably less than those of France (£350bn) and Germany (£270bn), the weight of banks and financial services in the British economy and the importance of the financial derivatives market for the City of London make Britain very vulnerable to a run on eurozone banks. That is why the British ruling class is so concerned that Europe addresses the deepening debt crisis throughout the eurozone. On the other hand it is determined to protect the parasitic and speculative activities of the City of London from European oversight and control. So the British government continually demands safeguards for the City of London as the price for accepting European measures, such as a eurozone banking union, to address the crisis in the eurozone.

Speaking in Berlin in early June, the British Prime Minister, David Cam­eron, made this clear when he said he ‘wouldn’t ask British taxpayers to stand behind Greek or Spanish deposits ... It’s not our currency so that would be inappropriate’. The Chan­cellor George Osborne reinforced this standpoint when he argued that while it was ‘necessary’ for the euro area to fully integrate its bank rules and deposit guarantees, Britain would stand apart. ‘There is no way that Britain is going to be part of any eurozone banking union’, he said. This shouting from the outside and demanding impossible safeguards is self-defeating. While Britain may block some EU legislation, elements of a banking union could be driven through with a majority vote under EU law despite Britain’s opposition. In addition Britain may be bypassed by the same procedure as that used to agree the fiscal pact of December 2011.3 Any such agreement could involve more than the 17 eurozone members, up to 25 in the case of the fiscal pact, and would allow a majority of countries to impose financial rules on Britain (Financial Times 8 June 2012).

As we have repeatedly argued, Britain is going to have to make a choice to be with Europe or with the US. Either way the power of the City of London will be severely curtailed.4 As one European diplomat noted: ‘Britain is at a crossroads… Will it be the centre of finance in Europe, for Europe, which is what it is now? Or does it go offshore? Some people have the illusion that it could be a Greater Guernsey. That is not a good way to go.’ The commentator Will Hutton similarly remarks that out of this crisis one way or another the euro will survive if only in a stronger, albeit smaller, integrated post-crisis Europe. Britain out of Europe would be a sort of Greater Guernsey suffering an economic rundown (The Observer 10 June 2012). The deepening eurozone crisis is inexorably confronting the British ruling class with choices it does not wish to make.

1 See David Yaffe ‘Greek resistance stalls European imperialist agenda’ in FRFI 227 June/July 2012 on our website at for background to 17 June election. See page 9 of this issue for further discussion of the present situation in Greece.

2 See the article on Spain p9.

3 See David Yaffe ‘Imperialists manoeuvre as eurocrisis deepens’, FRFI 225 February/March 2012 for this discussion of the fiscal pact,

4 See David Yaffe ‘Britain: parasitic and decaying capitalism’ FRFI 194 December 2006/ January 2007