Global Politics And Economics Intertwined

Marxists do not believe that it is possible to divide the study of reality into separate compartments named “Economics”, “Politics”, “History” and so on. The history of a country is the history of its political struggles conditioned by its geography, and economy, for instance. It is impossible to analyse Economics outside the political framework within which economic decisions are made. Similarly, Politics cannot be analysed outside the economic constraints placed upon decision making, and the economic interests of different classes and other groups within society. That is why Marx's study was into Political Economy. Capitalism in creating a global economy also cannot be analysed without understanding the complex interrelations between Politics and Economics, not to mention History, geography and so on. Recent developments have demonstrated the close intertwining of Politics and Economics in particular.

Central Banks Prepare To Flood The Economy With Money

Last night it was announced by the UK Chancellor, and the Governor of the Bank of England, that they intend to pump a further £100 billion into the UK economy. This morning, Mario Draghi, at the ECB has made clear their readiness to step forward with additional funding too. On the other side of the world, the Bank of Japan, has said it is in constant contact with other Central Banks, signalling that it too stands ready to print even more Yen. Members of the US Federal Reserve Board, like Janet Yelland, have, over the last week also said that conditions are favouring QE III, and the Bank of China, has already loosened monetary policy, having previously tightened it to slow down their overheating economy.

The immediate reasons for this potential action is political. It is the potential for a Syriza victory in the Greek elections on Sunday. In a recent blog post - Paul Mason wrote that Germany is preparing to push Greece out of the Eurozone.

“If Germany does indeed have a plan, a vision for a post-crisis Europe, its actions are conveying the strong impression that Greece will not be part of it. George Osborne let this slip yesterday, when he said Greece leaving might help the Germans do what is necessary to stabilise eurozone fiscally.

Numerous contacts confirm this: German policy, de facto, is to force Greece to choose to leave. That would be a building block for a north European, stable eurozone, but only one stage in the process.”

All of the economic and political decisions over the last two years have been preparing the ground for that eventuality, even if in the beginning it was the intention to try to hold the Eurozone together. Over the last two years, private debt in Greece, Ireland, Portugal, Spain and Italy has been increasingly turned into public debt. The announcements of George Osborne over recent months to set up measures for “Credit Easing”, and the current announcements to allow British Banks to borrow at very low rates from the Bank of England, in return for depositing assets with it – such as their huge volume of massively inflated property portfolios – are an attempt to do the same thing.

Over the last two years, Banks and other Bondholders who had lent money to Greece, were able to offload huge amounts of their Bonds in the secondary markets to the ECB, and other Central Banks. Yes, they did so at much lower prices than they had paid for those Bonds, but still it was better than getting nothing for them. That process continued until the last bail-out deal when the remaining private Bondholders – some of them Hedge Funds and others who had bought their Bonds in the secondary markets more recently, and, therefore, at much lower prices than their face value – agreed to an 80% haircut on those Bonds. In short, if Greece defaults the losses for private capitalists, banks and finance houses will now be minimal. The losses will instead fall upon the ECB, and other European Central Banks who have bought up those Bonds. In reality, what that means is that the cost will fall on European workers. That will be through either, higher taxes, to cover those losses, or else through lower real wages, as inflation rises due to increased money printing to monetise the losses. That is what has happened in Ireland, for instance. It was private homebuyers, who bid up the price of houses on the back of cheap money, creating a property bubble, which in turn stimulated borrowing by builders to build more houses that created a huge level of private debt. When the property bubble burst, it was the Irish Banks that had lent that money that stood to make huge losses – which would have also meant big losses for British and other Banks, who had in turn lent to the Irish Banks.

If Capitalism actually worked in the way its apologists, and the economic textbooks say, then the consequence would have been that those investors who had taken a risk in buying shares in those Banks, the Bondholders who had lent money to those Banks etc. would have lost all their money as they went bust. I suggested at the time that this is what workers in Ireland should have demanded, and that the workers then take over the Banks themselves to run as Co-ops – Sham Rocked. But, of course, Capitalism does not work like that. The Capitalist State exists to protect Capital from such events. So, the Irish Capitalist State intervened to bail-out the Bank shareholders and Bondholders. The consequence was that what were the debts of private individuals who had gambled and lost, became the debts of other workers. The debt of the Irish State ballooned, and the response was to slash it by cutting the State's spending on the Social Wage.

The same thing has happened over the last year in Spain. Now, it is happening in the UK. That is what George Osborne and Mervyn King's announcement amounts to. The UK housing market has been in at least as large a bubble as those in the US, Ireland, and Spain. British Banks have lent just as recklessly as in those countries, and have huge potential losses on their Balance Sheets. In the US house prices have fallen by between two-thirds and three-quarters. In Ireland, house prices have fallen by at least 50%, and as much as 60%. In Spain, house prices have fallen by around 50%, and are still hugely inflated, needing to fall perhaps another 50% from here, or even more if the European debt crisis escalates. In the UK, the OECD says that house prices are 40% above their long term average level, and on every previous occasion that has meant that prices fall by twice this amount, meaning that prices should fall by around 80%. The only reason they have not done so, yet, is because the Bank of England has kept interest rates at unsustainably low levels for the last two years, and that has allowed Banks to be more lenient in foreclosing on mortgages in arrears.

What is clear is that for the last 6 months or so there has been a developing new Credit Crunch. It has been diluted as a result of the LTRO's of the ECB at the end of 2011, and start of 2012, which lent money at low rates to Eurozone Banks, and by the QE done by the Bank of England. It is not that there is insufficient money. The global economy is awash with cash, as State's, and large companies have stashed away cash in unprecedented amounts, for fear of what the future holds. It is precisely that fear that causes the Banks not to want to let it out of their vaults by lending to each other, or to other risky borrowers. The risk of what happens after the Greek elections heightens those fears, hence the additional money printing.

Draghi Calls For A United States Of Europe

So, a political event in an otherwise irrelevantly small economy, has significant immediate economic consequences. But, those economic consequences have political consequences too. In his address this morning Mario Draghi gave the clearest call yet, for what effectively amounts to a United States of Europe. Draghi set out that economic necessities in Europe had driven the community to ever closer economic and administrative ties. But, he said, there comes a point when those closer ties, and the economic and political structures created by them required legitimation. That time had arrived. He argued that for small states, rather than a loss of sovereignty they had gained it from being part of the EU and Eurozone, because they now had a seat at the table to take part in decision making on wide issues, to which otherwise they would have had no voice. Similarly, as part of the Euro, they were not subject to the huge pressures that can be placed upon a small economy, and its currency. But, echoing the idea behind the American Revolution - “No Taxation Without Representation” - he argued that it was now time for there to be political legitimation of these new structures. In other words, there has to be a United States of Europe, there has to be bourgeois democratic structures put in place, so that the administration of affairs is at least seen to be accountable to voters, and taxpayers. That Political Union, would be the foundation for the Fiscal Union, which will ensure that the debts of the periphery can be collectivised, that there can be fiscal transfers, and the establishment of Eurobonds, which will create the basis of a European growth strategy, which will deal with the debt over the longer term.

But, of course, there is a problem of time scales here. The Eurozone politicians have shown themselves to be extremely sluggish in their responses over the last two years. If European voters were to be persuaded of the need for a United States of Europe, those politicians should have been setting it out a long time ago. Instead, because of the dynamics of their own national political systems, and their needs for election, they have continued to argue for narrow national interests. They may begin this process now, as they peer over the cliff, but it will take at least a couple of years to create a Political Union. Meanwhile the markets could crash the Spanish or Italian economies next week. Already, Spanish 10 year Bond Yields are over the crucial 7% level. The markets might give them the benefit of the doubt, if it becomes clear that they are serious about Political Union, and growth strategy – French Bond Yields have been falling steadily since Hollande's victory, and his proposals for Keynesian stimulus to promote growth in France – but that will require more than just hints, nudges and winks in that direction. It will require firm decisions by European politicians to put in train a process of establishing a United States of Europe, and a commitment to go out and convince the people of Europe of its necessity.

From A Spark To A Forest Fire?

The events in Europe are being seen in terms of the economic effects they may have on the global economy. However, there is another context in which they have to be placed. Last year, saw revolts in a number of countries in the Middle East and North Africa (MENA). Over the last ten years or so, the EU, in particular, has been trying to draw these economies into its orbit, establishing economic treaties with them etc. The idea was to follow a similar path as happened with the economies of the Balkans, and of Central and Eastern Europe. Plans were put in place so that if these economies progressed to become bourgeois democracies, they would be assisted with a modern day Marshall Plan. But, there are wider games being played in the area.

Europe is not the only major economic power seeking influence in MENA. It took the US a long-time to undermine, and then replace the influence that European Colonial powers had there. But, in addition to the US and Europe, China and Russia also have interests in the region. Russia has historical ties to Iran, and Syria. China has important economic interests in Iran, as well as having strategic interests, and interests in other parts of Africa. This has many similarities to the situation prior to WWI. The US has its main influence in the oil rich Gulf States. But, these countries have relatively small populations compared to Egypt, Iran, Iraq, and Syria. The Gulf States are ruled by Sunni feudal regimes, which oppress large Shia Minorities, or as in the case of Bahrain, majorities.

The US uses these Sunni regimes (as indeed it used Al Qaeda in Afghanistan to oppose the USSR), to channel money and arms to insurgent groups in the area. Qatar, for example, provided money weapons, and Special Forces troops to overthrow Gaddafi in Libya. The same means are being used now to ferment opposition to the equally vile Assad regime in Syria. Recent video of Syrian tanks exploding from the inside, after being hit by anti-tank shells, make it clear that, as in Libya, advanced munitions, probably using depleted uranium for armour piercing, have been provided.

US politicians like John Mccain, who believe that bombs and Cruise Missiles are the answer to every problem are keen to launch a war against Syria. But, as with Libya, it is becoming clear that what is now developing in Syria is a sectarian civil war between Sunnis, Shia, and Allawites. Already, that has spread into neighbouring Lebanon, which endured its own 18 year sectarian Civil War along similar lines. Sectarian violence has once again erupted in Iraq, which now is closely aligned with Iran due to the large Shia majority in both countries. Instead of bourgeois democracy in Egypt, Tunisia, and Libya, as the European hoped, the Sunni clerical-fascists have come to power, sparking the potential as in Libya, of these countries to descending into sectarian conflict, not to mention the potential for them to rally the masses around the flag of nationalism in opposition to Israel. Whilst the US, aligns with the Sunni Fedual tyrants in the Gulf States, Russia maintains its alignment behind the Syrian regime, and with Iran. Iran, seeks to rally the Shia around the flag of opposition to the Sunni rulers, and to Israel.

In a recent, pronouncement, McCain spoke about the role that Turkey could play in a War with Syria. But, McCain clearly has not studied history, certainly not the history of the area, and of the Balkans. Turkey has its own sectarian divides, not to mention the claims of the Kurds for their own state, which straddles Turkey, Iran, Iraq, and parts of Russia. A War by Turkey against Syria, in the context of a sectarian conflict between Muslims and Allawites, spreading into a sectarian civil war between Muslims and Christians in Lebanon, Sunnis and Shia in Iraq, attempts to utilise the situation by Kurds, in Turkey, and oil rich Iraqi Kurdistan would be almost certain to spread. It would probably see the current rebellions in Bahrain spread to other Gulf States, for example, if not into open warfare between states.

More seriously, it would be likely to resurrect sectarian divisions in Turkey between Christians and Muslims, and secularists. Given the history, and given the potential crisis in Greece, that could see the military once again take power, if Greece were pushed out of the EU, that creates the potential for a new Balkan War, with Greece coming to the support of Christians in Turkey, and Cyprus etc., whilst Muslims in Kosovo would intensify their pogroms against Kosovan Serb Christians, and so on. With Albania drawn into any such conflict, the potential would be for Italy to intervene in support of Christians across the region. WWI Part Two anyone?