FRFI 223 October/November 2011

Every day brings news of an ever-deepening crisis of global capitalism as neo-liberal economic policies continue to dominate in the major capitalist nations, reflecting the overwhelming power of financial capital. The US debt crisis remains unresolved and the minimal measures put forward by President Obama to stimulate the US economy remain locked in the political stalemate of the US Congress. In the eurozone, the sovereign debt crisis of the ‘peripheral’ states is destabilising the euro and undermining European monetary union in its present form. Stockmarkets are plunging, with bank shares leading the fall as the global economy faces a new recession and the prospect of sovereign debt defaults in the eurozone. DAVID YAFFE reports.

In early August the rating agency Standard & Poor’s (S&P) unprecedentedly downgraded long-term US Treasury debt from its triple-A status to AA+, questioning the creditworthiness of US government debt. S&P doubted the efficacy of the plan that Congress and the administration had agreed to tackle the deficit and pointed to the weakened ‘effectiveness, stability, and predictability’ of US policy making and political institutions at a time when challenges are mounting (Wall Street Journal 6 August 2011). IMF estimates for US growth in 2011 have been sharply cut to 1.5%, down from the 2.5% predicted in June.

The sovereign debt crisis in the 17 eurozone countries has significantly deepened. Having devastated the economies of Greece, Ireland and Portugal, it is rapidly spreading to Italy and Spain, two of the world’s 12 largest economies. Greece faces economic and social collapse as it enters a third year of deep recession, driven by the austerity and privatisation programme demanded by the neo-liberal troika of the EU, European Central Bank (ECB) and IMF in exchange for emergency funding. Interest rates on Spanish and Italian bonds rose above 6% in August, the highest levels since the creation of the euro. On 14 September Italy’s parliament finally passed a €54bn (£47bn) austerity package in order to assuage the financial markets. It was to no avail. A week later, S&P cut Italy’s credit rating by one level from A+ to A, increasing the cost of borrowing, with a further downgrade likely. S&P said that Italy’s growth prospects were poor and that the austerity package would have little impact on reducing Italy’s €1.85 trillion public debt, at 119% of its GDP. Latest forecasts put Italy’s growth at 0.6% in 2011 and 0.3% in 2012. The increasing likelihood of Greece defaulting on its debt is putting pressure on French banks, which are the most exposed to Greek debt. On 14 September credit rating agency Moody’s downgraded two French banks – Credit Agricole and Societe Generale – because of their exposure, with the possibility that a third – BNP Paribas – could follow. The exposure of these three banks alone to Greek government and commercial debt is more than €42bn. French banks have lost 50% of their stockmarket value over three months.

In the UK the ConDem government’s austerity programme is starting to bite. Economic growth was already weak before most of the fiscal squeeze (cuts in public sector spending and tax increases) was put in place. The IMF has now cut its growth forecast for the UK for the third time in only nine months. It expects the economy will grow by just 1.1% this year, down from its 1.5% forecast in June. It advised the Chancellor to slow down the pace of deficit reduction in the event of further underperformance of the economy. Unemployment is growing and real incomes are falling with inequality and poverty on the rise.  Public sector borrowing in August (latest figures) reached a higher than expected £15.9bn, the highest total for an August on record. Slower growth means less tax revenues and higher welfare spending and suggests that the government target date of 2015 for eliminating the public sector deficit is unrealistic.

The debt crisis is running out of control as international institutions, central banks and governments desperately search for measures to plug the financial holes that are now threatening the international banks. On 15 September five of the world’s leading central banks – the US Federal Reserve, the Bank of England, the ECB, the Swiss National Bank and the Bank of Japan – took determined, concerted action to prevent a dollar funding crisis in Europe, by announcing they would be pumping billions of dollars into the financial system over the coming months. The banks were finding it increasingly difficult to fund their day-to-day operations in adequate amounts from financial institutions alarmed by the eurozone debt crisis, particularly the 10 largest US money market funds. The impact of the central banks’ funding was limited and temporary. On 21 September banks on both sides of the Atlantic had their credit ratings downgraded: three US banks including the biggest US bank, Bank of America, and two Italian banks. The IMF reported that the exposure of European banks to the crisis-ridden parts of the eurozone had swollen to €300bn since last year. It warned that time is running out to deal with the instability within the global financial system.

The US Federal Reserve added to the growing alarm by announcing a new radical programme, ‘Operation Twist’, to buy $400bn long-term Treasury bonds funded by selling an equal amount of shorter-term bonds, in a desperate attempt to stimulate growth in the US economy by driving down long-term interest rates. The Bank of England also indicated that it was inclined to pump billions more into the British economy in a new round of ‘quantitative easing’. The markets were not impressed. The FTSE 100 index fell 4.7%, the largest percentage fall since March 2009 in the depths of the last global crisis, wiping £64bn off shares. The US Dow Jones index was down 3.5%. In the week ending 24 September, $3.4 trillion dollars were knocked off global stockmarkets.  Prime Minister David Cameron said, in a speech to the Canadian parliament, that the global economy is close ‘to staring down the barrel’. The capitalist system is fracturing.

No end to the euro crisis

The sovereign debt crisis is merely the second phase of the global crisis that erupted with the collapse of Lehman Brothers three years ago on 15 September 2008. That precipitated the biggest financial meltdown in history. Underlying the crisis was an over-accumulation of capital in the main imperialist countries. It led to the biggest recession since the 1930s. The capitalist system survived this process because the state underwrote the debts of the banks and financial institutions on a scale never seen before.1 The huge state debts run up to save the banks in turn precipitated the sovereign debt crisis. The crisis is most severe in the smaller eurozone states with weaker banks, whose ruling class groups borrowed relatively huge sums at low euro interest rates.2 The political divisions among the European imperialists on how to deal with the eurozone’s sovereign debt crisis rest on disputes over saving their investments and limiting the inescapable losses to their  international financial institutions. These divisions are threatening to destabilise the eurozone and European Union and with them the global financial system.

What is happening to Greece serves as a warning to us all as the imperialists ruthlessly loot and plunder the country’s resources and wealth, driving hundreds of thousands of working people into abject poverty. The people of Greece are being made to pay for the capitalist crisis precipitated by the international banks, so that the banks’ investments and profits can be sustained. Driving this process forward is the neo-liberal troika of the EU, ECB and the IMF demanding ever greater austerity, cuts in public spending and deregulation before releasing the ‘bailout’ funds needed to keep Greece’s economy just functioning.

Greece cannot pay back its debts but is part of the eurozone. Sections of the European imperialists want to keep Greece in there, squeezing whatever they can out of the country before the inevitable default. They fear the consequences of an immediate default and the threat of it spreading to other eurozone members. They support the ECB purchases of eurozone government debt to stabilise the weaker eurozone economies, including those of Italy and Spain. Others do not support any further bailouts or ECB interventions and want Greece to default and leave the eurozone, whatever the consequences. Major divisions exist in the ruling German coalition government over this issue and in the German population. Germany’s member of the ECB’s board, Jurgen Stark, abruptly resigned from the board over the issue of ECB’s purchase of eurozone government debt, causing the euro to fall and further turbulence in the world’s stockmarkets. Germany’s economy minister Philipp Roesler, leader of the FDP, a junior partner in Angela Merkel’s coalition government, said that they should discuss ‘if necessary, an orderly bankruptcy of Greece’. The Dutch Prime Minister, Mark Rutte, also wants the possibility of a forced exit from the eurozone by countries not complying with eurozone budgetary rules.

Both the US and Britain are horrified by the lack of leadership among Europe’s politicians to stabilise the eurozone and avoid a market meltdown. The US Treasury Secretary, Timothy Geithner, took the unprecedented step of attending the mid-September EU finance ministers’ meeting to urge European leaders to speed up the ratification of the 21 July agreement3 to set up a bailout fund to help stricken members of the eurozone. He also wanted to see the funds for the European Financial Stability Fund raised above the agreed €440bn. At the same meeting British Chancellor George Osborne said that it is in Britain’s interest that the eurozone is stable. He indicated his support for ECB’s purchase of bonds of eurozone countries. He was in favour of EU Treaty changes to further integrate the eurozone and strengthen fiscal integration as long as Britain plays no part in greater European integration. He said that ‘there is a remorseless logic that leads from monetary union to fiscal union’. But it is clear that British interests in financial services will have to be protected. What remarkable arrogance from a chancellor desperate to protect the global interests of the City of London without provoking the eurosceptics in his own party.

What is clear, however, is that the leading European powers, Germany and France, will be forced to take all the steps necessary to protect the euro and sustain the eurozone. They have little option but to resolve the divisions in their own ranks and between the main eurozone nations, if European imperialism is to maintain its challenge to US imperialist dominance of the global economy.

Meanwhile negotiations continue over the supplementary austerity measures needed before the troika releases the delayed €8bn EU-IMF payment – part of last year’s agreement with the EU-IMF – necessary for the Greek government to pay salaries and pensions in October. The proposed new tax on property, expected to raise around €2bn, was not considered enough to release these funds. They are being forced to collect it through electricity bills as tax workers refuse to collect it. On 21 September the government proposed further measures: 20-30% cuts in pensions above €1,200 per month; the tax threshold on earnings to fall from €8,000 to €5,000 and the number of state employees on partial pay, about 60% of salary, to be raised from 20,000 to 30,000. The austerity programme is draconian and is destroying the Greek economy. The GDP fell by a further 7.3% in the second quarter of 2011. Unemployment has reached 900,000 in a population of 11 million and is projected to reach 1.2 million. The debt to GDP ratio could reach 200% in 2013, up from 115% in 2009 (The Guardian 20 September 2011). This is how the imperialists plunder and loot the Greek economy in the interests of the imperialist banks. Strikes, riots and demonstrations have become daily features of Greek political life.

Britain hitting the buffers

Greece shows us the shape of things to come. The ConDem government’s austerity programme is driving the UK economy back into recession. Poverty and inequality are rising, wages are falling and unemployment is growing.  The Vickers Commission report on banking reform, published in September, is a damp squib.

Britain is forecast to have the lowest growth rate of the G7 countries apart from Italy. UK business investment fell by 3.2% in the first quarter of 2011. Unemployment has reached 2.51 million, 7.9% of the economically active population. Unemployment among 16-24 year olds rose 78,000 in the three months to July to reach 973,000 or 20.8% of the age group. The number of women unemployed was 1.06 million, the highest for 23 years. The inactivity rate was 23%, with 9.4 million 16-64 year olds not in work. As the growth rate slows down, unemployment will grow rapidly. 111,000 jobs were lost from the public sector in the three months to June 2011 with only 41,000 created in the rest of the economy.

The real income of British households fell by 0.8% in 2010, the first fall since 1981. According to the Institute for Fiscal Studies, it is expected to fall by more than 10% over the next three years, with those on the lowest incomes, the poorest 30%, suffering most from the ConDem government’s austerity measures. 29% of children (3.8 million) live in poverty and this is expected to grow by 2 percentage points (300,000) over the next three years. Britain has very high rates of inequality. Average earnings fell last year. They increased by under 2%, less than half the rate of inflation. In 2010 the median pay of FTSE 100 companies’ chief executives rose by 32% to £3.5m, more than treble the rise of the FTSE index. Their pay is now 145 times the average salary. The multiple was 69 times in 1999.  In addition, the poorer sections of the population experience a higher rate of inflation than the rich, so inequality will continue to grow. At the LibDem conference, Vince Cable, a minister in the coalition government, compared the economic crisis to a war. He should have said class war.

The much heralded Vickers Commission report on Banking had very little bite. The so-called reforms do not have to be implemented until 2019.  The section on separating the banks’ risky and speculative operations from their retail business will cause the banks few concerns. The retail arm of the banks and the investment business are to be ringfenced but not separated. The Commission will not dictate to the banks where each institution should place the ringfence and capital can be moved between the two ringfenced sections of the bank. The banks, however, will have to have a larger capital cushion than previously to cope with a new financial crisis. Bob Diamond, the notorious Chief Executive of Barclays Bank, applauded the report ‘as a welcome step towards greater clarity that banks need to be able to operate with confidence’ and he praised the decision to make the core ringfencing plan flexible. This says it all.

The bankers continue to rule as austerity grows, the rich get richer and wages fall. Tinkering with the British economy will change nothing. Resistance is inevitable and the riots of early August are an early warning sign to the ruling class. Capitalism is fracturing, we must hasten its downfall.

1 See David Yaffe ‘Coalition declares class war’ in FRFI 216 August/September 2010, on our website at

2 See James Martin ‘Euro crisis: imperialists in conflict’ in FRFI 222 August/September 2011 for analysis of how the euro crisis unfolded and its impact on the eurozone,

3 See ‘Euro crisis: imperialists in conflict’ for an analysis of the 21 July agreement.