Whither The Eurozone?

Europe will almost certainly face a recession next year which might generate "social unrest" and the kind of populist nationalism seen in the 1930s. "That's the real danger of the present situation – that by imposing fiscal discipline at a time of insufficient demand and a weak banking system... you are actually... setting in motion a downward spiral," George Soros warned yesterday. His comments follow those in a similar vein quoted in my last blog from Nouriel Roubini.

Today The Independent has a front page article on the crisis in Spain, which is now taking over from Greece, as being emblematic of the problems facing the Eurozone. In fact, according to some comments on CNBC yesterday, traders have known for some time that Spain was getting frozen out of international credit markets. Its likely that the success of some of the recent debt issuances has been down to purchases by the ECB. A few weeks ago the ECB began to do what I said was the obvious solution for the Eurozone - it began to print money to buy up the Bonds issued by the Club Med governments. Unfortunately, under pressure from Monetary hawks, particularly in Germany, it agreed to sterilise this money creation, by withdrawing an equivalent amount of money from circulation elsewhere, by taking money out of commercial banks. Its suspected though that it has not fully sterilised the money it has printed. If as seems likely Spain needs to be bailed out such sterilisation will not be possible. That is good.

Over recent weeks the problems of Spain's financial sector have become apparent. The problem does not lie with its main banks. Unlike the banks of Northern Europe, Spanish regulations appear to have prevented the big Spanish banks from engaging in the purchases of the various derivatives of US sub-prime debt that threw banks like RBS into turmoil. The problem in Spain appears to lie with the "Cajas". These are small local banks, similar to a Building Society in Britain, and with a similar function. Given the huge bubble in Spanish property that blew up over the last 10-20 years, it is not surprising that these Cajas had a lot of dodgy debt on their books. In essence the problem was the same as that with the sub-prime debt in the US, except this debt was not so sub-prime to begin with. Many of those who borrowed money to build houses for themselves, or as a speculation, were good for the money, and given that demand for housing in Spain continued to rise during all that period, lending money for such ventures or purchases seemed a safe bet. But, the Credit Crunch, and subsequent recession brought that to an end. The assets that sat on these banks Balance Sheets, suddenly did not look so solid as houses. The holders of mortgages might well have lost their jobs, or seen their businesses fold, as the construction boom ended in bust, with massive unemployment in the construction sector. Even now the value of property for sale in Spain is probably two or three times what it should be, as I wrote recently. When that reality makes itself felt, the crisis of personal debt in Spain will be crushing. If the Spanish Government, and the EU want to prevent a repeat of the crisis of 2008, they have to prepare for that now, and take action now, because as Roubini said the other day, if another major credit crisis is allowed to erupt now, states do not have the bullets left to fire that they had 18 months ago. It would mean something approaching a Depression, it could mean the kind of resort to nationalism that Soros speaks of.

But, that by no means HAS to happen. Back in 2008 I wrote of the possibility of this kind of development.

"The problem that could arise given the scale is that the same causes of breakdown of trust and relations between Banks, which led to the Crunch could simply be transferred to the relations between States now acting as banks. We have already seen that to some extent. It was seen over the actions of the Dutch, Belgian and Luxembourg governments over Fortis. It was seen in the scramble for advantage when Ireland stepped in to guarantee all Bank deposits, threatening a stampede out of deposits in other EU countries. Most classically, it has been seen in the conflict between Britain and Iceland over deposits in Icelandic banks, and which was reminiscent of the 1970’s Cod War. It is certainly the case that some of these banks such as UBS of Switzerland have Balance Sheets bigger than the GDP of their host nations.

If this problem does begin to materialise – and it is clear even now that the huge sums put in by States will have to be increased – there are essentially only three solutions. The first is the Libertarian/Free Market solution, which I saw presented on TV the other day by Peter Schiff. It is essentially for the State to withdraw and allow the market to have its way. The argument is that the Banks that brought this on themselves by their actions will go bust – those that make this argument never consider that the biggest losers will not be the bankers who made the decisions, but will be the workers who lose their jobs, but who never had any say in the decisions that caused the crisis – and those Capitalists – in Banking or otherwise – who acted responsibly will do well and pick up the pieces. The Capitalist State will never adopt that position under current conditions. Were this at the beginning of a Long Wave downturn it might have no choice, and would prepare to promote fascism as it did in the 1930’s, to beat down the inevitable social eruption. For now, it has no need of so risky a strategy. Rather, it will either simply pump even more money into resolving the problem – a few years ago Ben Bernanke earned himself the nickname “Helicopter Ben”, because he argued that the fed could defeat deflation by simpling printing dollars and dropping them from helicopters – or else it will seek to encourage the trillions of dollars held in various Sovereign Wealth Funds to come in and re-capitalise the collapsing financial system."

Where We Are Going

That is what the State in the US has done, and continues to do. As with the crisis in the Gulf of Mexico now, the US State is able to intervene to bail-out a single state, or in this case a number of states by mobilising its central resources that dwarf those of the individual states. Other States around the globe from China to Brazil, have done a similar thing in order to overcome the economic crisis, and to promote economic growth. If there were a single EU State, it would have done the same thing. But, currently there is not. Therein lies the problem. Capital has a need, and a tendency to concentrate and to centralise. It does that at the level of the individual firm, but it also does it at the level of the market. This is historically, a hugely progressive development. It is what subsumes all previous divisions between human beings, based on the ridiculous concept that they have some innate attachment to the place where they just happened to be born, and that this attachment ties them ineluctably to others who were also born there.

But, this concentration and centralisation like everything else within Capitalism, is a contradictory process, because like the functioning of Capitalism itself it is driven by a largely blind process. It is not a process that is thought out, and planned in advance, but proceeds on the basis of the needs of Capital becoming expressed via its own operation, and the interaction of various Capitals. As Marx puts it in Capital, Competition, begets Monopoly, and Monopoly begets Competition. Competition between firms leads to some becoming bigger, more efficient, and others eventually going bust. The bigger more efficient firms pick up their market share, and become even bigger, even more efficient. Then they can simply buy up even those efficient firms that are simply small, and lack the Capital to resist their advances. But, the same process that leads to the development of huge firms, with huge amounts of fixed capital tied up in production, requires ever larger markets so that this large scale production can be sold. That is why new economies like the US rapidly passed from the stage of segregated markets, to a single large domestic market. Numerous attempts have been made to do the same thing in Europe. World Wars I and II could be seen in that vein. The attempt to establish the EU after WWII, has been an attempt by Capital to bring it about without the need for a single national Capital to exert hegemony within it.

As I have written in the past these attempts at establishing such larger economic units, are in fact part of that historic drive of Capital to create a single World Economy. Imperialism & War. But, that process is racked by contradiction. That contradiction arises from the anarchic nature of Capitalism, and from the continued separate interests of individual Capitals, fractions of Capital, and the refraction of that through the competing interests of political elites. That process is what is being played out in Europe today.

The reality is that the debt problems of both the UK, and of the Club Med economies could be dealt with, without massive economic dislocation, and the social unrest that will flow from it. Some economists, and even some bourgeois politicians are themselves setting out that process now that I outlined several weeks ago. The first thing that is required is the recognition of the need for a strong centralised EU State. History suggests that the best political framework for Capital Accumulation, and through which Capital transmits its ideas to this State is that of bourgeois democracy - such a State could have arisen under the jackboot of German Nazism, for instance, but Capital would ultimately have had to replace it with bourgeois democracy. That means that the facade of the European Parliament has to be replaced with a body with real democratic credentials, with real legislative power, and control over the Executive. It means that this State must be the sole, or prime issuer of State debt, that it must have prime control over fiscal policy and so on.

That would enable such a State to implement policies that not only prevented bankruptcy in individual states, but which utilised fiscal and monetary policy to promote growth within the EU. Such growth, together with a monetising of the debt, would resolve the problem over a few years without any major economic crisis. But, such a policy removes control over monetary, and fiscal policy largely from individual states and hands it to such a central state. At the moment, individual EU countries, because of those contradictions referred to above, are not prepared to make that step. Even so, countries like the UK that retain control over fiscal and monetary policy, and over their own currency, could follow such a policy. The fact, that they are not proposing to do so reflects the political character of the governing parties, which are largely tied to the more backward, more nationalistic sections of Capital. The Tories, at least in their public pronouncements, for example, have to give vent to those kinds of concerns from the middle class, and small business people that make up the backbone of its membership, and of its core voters. But, the State as opposed to the Government is tied directly to, and reflects the interests of, the dominant sections of Capital, not these backward elements. The interests of big Capital, of multinational Capital are not to plunge Britain, Europe, or the World Economy into an unnecessary downward spiral - even if due to the Long Wave boom such a downward spiral would be of relatively short duration. It is likely to resist with all its bureaucratic might any attempts to pursue policies that lead to such a result.

At the end of the 19th Century, Tories like Disraeli with his "Young England" movement, reflected the reactionary interests of the past, of the old landed aristocracy, whereas the Liberals who represented the industrial bourgeoisie reflected the progressive interests of the future, of the breakdown of all of that old, statist, monopolistic and paternalistic society. Today, there is no difference between the Tories and Liberals. Sections of both parties reflect the interests of Big capital, for a more pro-Euro future, but the coalition is hog-tied by the reliance of the dominant Tory Party on its reactionary base. That is one reason that both parties will have to restructure down the lines of that fracture. But, just as at the end of the 19th Century, workers had an interest in forming an alliance with Liberals against the Tories, with a struggle for a progressive future rather than a reactionary past, they had no reason to simply subsume their particular interests within those of the Liberal bourgeoisie. The same applies today. The working class has a definite interest in replacing the remnants of those old national borders with a single European state. It certainly has an interest in opposing anything that fosters those "nationalist" sentiments referred to by George Soros above. To the extent that the Liberal bourgeoisie pushes through such measures, workers should welcome it. But, our task as Marxists is to point out that it will have carried out such actions for ITS benefit not for ours. Capital will not be able to carry through such an agenda smoothly, if at all, just as it cannot even guarantee bourgeois democracy consistently, because the logic continually throws up a contradiction with its own immediate interests. Our task is to argue for our own Workers Europe.