A Damp Squib

Well, yesterday could have been A Big Day, in fact, it was a damp squib. Having led the markets to believe that they were going to announce a tactic of shock and awe to intervene in the Bond Markets to put an end to the contagion that has been spreading for the last few weeks, ECB Chairman, Jean Claude Trichet, failed to deliver. He did say that the policy of continuing to make liquidity available to Banks would continue for another three months, which was at least better than him talking about the need for an exit strategy from that policy. But, the kind of decisive action needed to staunch the flow it wasn't.

Mohammed El Erian, Head of the world's largest Bond Fund, PIMCO, had earlier described the Eurozone Debt Crisis as a slow motion train wreck. He told CNBC,

"The first rule of crisis management hasn't been met by the Europeans, and that is to get ahead of the crisis, be seen as proactive rather than reactive, As long as they're being seen as reactive we're going to have a slow-motion wreck going on in Europe. We're going to wake up and it's going to be a new country we're talking about. Unless we see more than just liquidity support, unless we see something that deals with the balance sheets, expect this contagion to go up."

Rather than doing that, what yesterday, amounted to was the ECB announcing that it was thinking about applying the breaks to avoid the wreck that everyone else could see was already unfolding. Yet not only did this result in Eurozone periphery economy Bonds being sold off, but, in fact, the spread between those Bonds and German Bunds narrowed yesterday and today. Spain held an auction yesterday of 3 year Bonds, which had bids for more than double the amount being offered, though the interest rate it had to pay on them rose by 50% compared with the previous auction just a month ago. The reason for the reduction in spreads is that despite the words of Trichet, the actions of the ECB have spoken more loudly. Traders say that the ECB has for the last few weeks been buying peripheral economy Bonds in the secondary markets in increasingly large amounts, particularly of Ireland and Portugal. That, perhaps tells us how much those Bonds would have fallen if they had not been doing that. The information getting out that this is what the ECB is doing, is what has narrowed the spreads, because as El Erian says, the basic rule in the Bond Markets is to look at what the State is going to do, and get ahead of it. If traders believe that the State is going to buy Bonds on a large scale, then that will increase the price, and traders want to get in ahead of that.

What this demonstrates, yet again, is something I have been discussing over the last few months, and which, in fact, the Wikileaks revelations also demonstrate. The way modern states work, is not on the basis of democracy and openness. In recent days, we have heard a multiplicity of politicians, and full-time bureaucrats decrying the leaks, and making the case that it is obvious that such people have to lie through their teeth in what they say in Public compared with what they actually think and do behind the scenes. The reality is that if they had to act out in the open, if they had to express their real beliefs and ideas, and motivations for doing what they do, a large part of the ideological edifice of Capitalist society would be torn down. Either they would not get support from the population at large for the actions they propose, or else they would be forced to air the differences between different sections of the ruling class and its state in public view, in order that the dominant section could win popular support for its actions. That would weaken the position of Capital as against Labour, it would mean putting some real content into the sham of bourgeois democracy. So instead, the ruling class hold these debates behind closed doors, the blood is cleaned up off the carpet, before the rest of us are allowed a look into the room.

In short, the changes that Big Capital needs in Europe, and which I have outlined over recent months will not be brought about by open democratic debate, but by bureaucratic wrangling, and arm twisting. In the end the people of Europe will then be presented with a fait accompli, and whatever the Tories say now about their commitment to holding referenda on any significant changes will go out of the window. Or else, if they are forced into a corner by their right-wing, Eurosceptic wing and base, they will find themselves increasingly marginalised. Either Britain would be excluded from such changes, and become an insignificant backwater off the Coast of a European State, or else the Tories themselves would find themselves having to call an election, allowing in a Government that would carry through the necessary changes.

In another interview with CNBC, yesterday, Spanish PM, Zapaterro, spelled out those necessary changes towards the creation of an EU state.