FRFI 229 October /November 2012

15 September 2012 was the fourth anniversary of the collapse of the financial services corporation Lehman Brothers, the largest bankruptcy in US history. This event triggered the global financial crisis and the deepest crisis of the capitalist system since the Great Depression of the 1930s, a crisis which shows few signs of receding. The eurozone, having contracted 0.2% in the second quarter of 2012, will almost certainly follow Britain into a double-dip recession. The US economy is slowing down and the US Federal Reserve has in desperation launched a third open-ended round of ‘quantitative easing’. It will inject an extra $40bn into the US economy each month through purchases of mortgage-backed securities until the US labour market improves. The latest OECD report forecasts slower growth in Japan, China, India and Russia. DAVID YAFFE reports.

Europe’s banks have massively retreated from the US market as a result of bank failures, asset write-downs and sales of loans and businesses. In March this year (latest figures) US assets held by eurozone banks had fallen $540bn from their $1.51 trillion peak in September 2007. German banks have led the way, reducing their assets by $160bn from a peak of $427bn in 2007 to $267bn in March 2012. German banks have also retreated from the weaker parts of the eurozone with cross-border lending to those countries falling by nearly one-fifth from January this year. Their net loans to Italy fell by 25% in the five months to 1 June. The major European banks have taken defensive action to restrict their losses as the economic crisis has deepened. US banks have also reduced their exposure to the crisis-ridden eurozone economies and in early August were telling their borrowers and counterparties to restructure their contracts or find another bank as they prepare for a possible exit of a country from the eurozone (Financial Times 23, 27 July and 6 August 2012).

Austerity is devastating the weaker eurozone economies with growth rates plummeting and unemployment rising. Latest predictions by the European Central Bank (ECB) see the 17-country eurozone GDP contracting overall between 0.2% and 0.6% in 2012. For the weaker eurozone economies the impact is far worse. Greece’s GDP is forecast to fall by 7%, Portugal’s by 3%, Italy’s by 2.4%, and Spain’s by 1.8% in 2012. Unemployment in the eurozone reached 18 million in July, 11.3% of the working population, the highest level since the launch of the euro in 1999. The under-25 unemployment rate in the eurozone is 22.6%. Spain has the highest unemployment rate of 25.1% with the under-25 rate at a shocking 52.9%. It is closely followed by Greece with an overall rate of 24.4% and an even higher under-25 rate of 55%. Portugal’s unemployment rate is 15.7% with an under-25 rate of 36.4% and Italy’s is 10.7% with an under-25 rate of 35.3%. It is against this crisis-ridden background that the dominant European countries are taking measures to stem the debt crisis in the eurozone and save the euro.

Saving the euro

As we have argued in recent articles in FRFI, the deepening eurozone crisis is forcing the pace, with Germany, the dominant European power, having to accept significant moves towards a banking, fiscal and eventual political union in the eurozone, the essential underpinning of a strong and powerful European imperialist bloc.1

During the last week of July Spain’s borrowing costs continued to rise with the yield on 10-year bonds reaching an unsustainable record high of 7.75%. John Stopford, a fund manager at Investec Asset Management, said that ‘Spain is close to losing access to markets entirely’ (Financial Times 24 July 2012). Spain’s 17 autonomous regions have an estimated €15.8bn of debts to finance in the second half of 2012 and some of the largest regions are being forced to ask for urgent assistance from the central government. A Spanish default would almost certainly lead to the destruction of the eurozone and with it the euro. The leading players within the European institutions were forced to act.

On 26 July Mario Draghi, the president of the ECB, pledged to safeguard the future of the euro. At a conference in London he said that the ECB was ready to buy the bonds of eurozone countries to curb rising yields and boost confidence. ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro’, he said. ‘Believe me it will be enough.’ The markets reacted positively to these remarks. Stockmarkets rose, Spanish 10-year bond yields fell below 7% and the euro rose against the dollar.

A week later the markets recoiled after Draghi made it clear that eurozone countries had first to turn to existing rescue funds before the ECB would intervene. There would be no instant ECB action. He said that the ECB would bring forward a viable plan and, additionally, he eased private investors’ concerns by saying that the ECB would not put itself at the back of the queue for absorbing any losses on investments. Draghi would have to offer a lot more to reassure the financial markets.

On 6 September Draghi, with the backing of the ECB’s governing council, came up with the revised plan. The ECB would deploy open-ended and unlimited monetary firepower to save the euro. The ECB would offer to purchase eurozone countries’ short-term bonds (up to three years) in the secondary market in a programme called outright monetary transactions. The aim was to lower the cost of borrowing for Spain and Italy to counter risks of fragmentation of the eurozone and the demise of the euro. ‘The euro is irreversible’, Draghi said. But there would be a price to pay. This attempt to tame Europe’s sovereign debt markets would come with the tough fiscal and structural reform conditions, the brutal austerity regimes that Greece, Ireland and Portugal faced when they were bailed out. Spain and Italy would have to apply to the eurozone’s existing rescue funds for help and accept the ‘bail-out’ conditions before the ECB would trigger its bond-buying programme. Neither government has so far indicated any intention of doing so soon. But this could change. Whatever happens, the mass of ordinary Spanish and Italian people will be further impoverished to underpin the eurozone and save the single currency.

Strong resistance to this plan came from the German Bundesbank, whose president, Jens Weidmann, cast the only vote against the new policy in the ECB’s 23-strong governing council. The other German representative on the council, Jorg Asmussen, helped to draw up the plan and the government in Berlin has shown little resistance to it. The IMF was willing to cooperate within its framework. The British Prime Minister David Cameron and the French President François Hollande both gave their support for the plan after meeting in London. The British Institute of Directors said the policy shift was a ‘game changer’. The financial markets were satisfied. Stockmarkets rose and the euro reached its highest level against the dollar for two months at $1.265. Spanish and Italian 10-year borrowing costs fell to three and five-month lows.

Explicit in the plan are political demands on eurozone governments for a greater pooling of sovereignty and surrender of national powers in fiscal and budgetary policy to European institutions. As we argued in the last issue of FRFI: ‘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.’

Towards a federation of European nation states

On 12 September the European Commission president, Jose Manuel Barroso, presented proposals giving new powers to a European Banking Authority (EBA) which coordinates rule-making between the EU’s national banking supervisors. The aim is to have a single supervisor for the eurozone as soon as possible, giving the ECB the ultimate authority to oversee some 6,000 banks in Europe. This is seen as an important step towards a full banking union. Britain supports the creation of a banking union for the eurozone but would not take part, and is unhappy with proposals to strengthen the EBA, which could make it easier for the City of London to be overruled on banking regulations. There was a heated debate at a meeting of eurozone finance ministers on these issues in Cyprus on 14 September and a further meeting of EU leaders will discuss the proposed changes in December.

Also on 12 September the German constitutional court ruled that Germany could ratify the establishment of the European Stability Mechanism (ESM), the €500bn rescue fund to tackle Europe’s sovereign debt markets. It attached a condition that Germany’s liabilities will be capped at €190bn, but the Bundestag (Germany’s parliament) and Germany’s ESM representatives could override this limit. 54% of Germans wanted the court to block the ESM and 37,000 Germans had petitioned the court on the grounds that the ESM was anti-constitutional. Angela Merkel, the German Chancellor, said after the ruling: ‘This is a good day for Germany’. Another obstacle had been overcome.

Merkel has argued for ‘more Europe’, more integration to resolve the crisis in Europe.2 Her Christian Democratic Party has passed a motion calling for greater integration in Europe. Barroso lined up behind Merkel in making a rallying call to the European Parliament on 12 September: ‘Let’s not be afraid of words. We will need to move towards a federation of nation states. That is what we need. This is our political horizon.’ He wants to see ‘pooled sovereignty’ in a new European federation with harmonious fiscal, economic and budget policies, and with a directly elected European Commission president. Such a federation would probably necessitate a new treaty, or at least a renegotiation of the Lisbon Treaty, and force referendums in some EU countries. Germany would need a new constitution, and that will require a referendum (The Guardian 13 September 2012). Germany’s main opposition party, the SPD, has said it will support such a referendum and the relevant changes to the constitution. The British ruling class, split not only on the question of European integration but even on membership of the EU, could be forced to make a choice that it has always tried to avoid: to be with Europe or with the US.3

However the juggernaut rolls on, driven by the motor of capitalist crisis. On 18 September, following discussions between the foreign ministers of 11 member countries of the EU over the future of Europe, a 12-page document was launched by the German foreign minister Guido Westerwelle. The document said that the ‘EU must take decisive steps to strengthen its act on a world stage’. Five of the six largest EU countries, excluding Britain, have called for a new pan-European foreign ministry, majority voting (to bypass a British veto) on common foreign policies, a possible European army and a single market for pooled EU defence industries. It also wants to see increased integration in the sphere of justice and home affairs (The Guardian 19 September 2012). A week earlier Europe’s largest aerospace company EADS and Europe’s biggest defence contractor the British company BAE Systems had announced that they are discussing a €38bn merger to create a European rival to US aerospace corporation Boeing.

In this process of creating a European imperialist bloc capable of challenging US imperialism’s global dominance, divisions and conflicts are inevitable between and within the dominant European imperialist countries. The logic and driving forces within the capitalist system will ensure that in one way or another they get to be resolved.

1?See David Yaffe ‘Edging towards a European imperialist bloc’ in FRFI 228 August/ September 2012 on our website at

2?See David Yaffe ‘European imperialism tightens its grip’ in FRFI 224 December 2011/January 2012, on our website at

3?See David Yaffe ‘Britain: parasitic and decaying capitalism’ FRFI 194 December 2006/January 2007 on our website at

Fight Racism! Fight Imperialism! 229 October/November 2012