Euro Debt

This week has been the first week of the new year that Eurozone economies have gone to the Bond Markets. They seem to have dodged a bullet for now.

Earlier in the week, Portugal, thought to be the next country in the sights of the markets for a bail-out, managed to find buyers for its Bonds, and on its Ten Year Bond maturing in 2020, it managed to sell it with a slightly reduced Yield, 6.716 percent from 6.806 percent in the previous sale in November. The October 2014 bond yielded 5.396 percent, up from 4.041 percent in October's auction.

But, in the weeks preceding these auctions, the ECB had been intervening considerably in an attempt to ensure that the Portuguese debt auction was succesful. One reason for that was the fact, that a much larger Spanish and Italian auction was due just days later. The Portuguese auction was quite small compared with the funding that Spain and Italy need to raise.

The ECB has been buying Bonds in the market for some time, and we do not know how much of the success of the Portuguese auction was due to the ECB buying the debt, by one means or another. But, given the level of intervention to ensure its success, the slightly reduced yield on the ten year from 6.8 to 6.7, is hardly stellar. Moreover, the increase in yield from 4 to almost 5.5% on the 2014 Bond represents an increase of more than 25%!

Its thought that any rate over 7% is crucial, because over this level interest charges become so significant as to make it almost impossible to finance debt out of income. It had been feared that the Yield might have gone over 7%, but even at 6.7%, the interest burden on Portugal is considerable given that it has been hardly growing for the last decade, and the austerity measures introduced by the Government, far from improving that situation are sending its economy back into recession.

In fact, Portugal's problems contrast with those of Spain. Portugal did not run up a massive deficit as other countries did. Its problems arise not from accumulated debt, but from a stagnant economy, unable to cover the debt it does have. Although, Spain, as a much larger economy than Portugal, has some advantages, and its economy grew rapidly over the last ten years or so, in some ways its problems are greater. A large part of the growth it enjoyed was based on a bubble in its property market, which sparked a boom in its construction industry. The property market is no longer bubbling up, and with 1 million empty houses, its cosntruction industry come to a grinding halt, and is one reason that Spain's unemployment rate is at depression levels of 20%, and youth unemployment of 40%.

In an interview with CNBC, Spanish Finance Minister,Elena Salgado, said,

" “We are confident on them because as you know we have gone through a big strong restructuring process, we have gone from forty-five savings banks to seventeen and of course we have gone through a stress test, very tough stress tests I have to say,”,

but, of course, these are the same stress tests that irish Banks passed last year, the same Irish Banks that have now essentially collapsed, and been taken over by the Irish State. She went on,

“Transparency is going to increase because at the end of this month all savings banks are going to say what assets they have,”

“I think you have always to consider the level of our non-performing loans in Spain is very low. The mortgages are paid differently than in other countries, you respond not only with the house but with all the properties you have so this is one of the reasons of course that the level of non-performing loans is very low,"

But, this is reminiscent to the delusions that were perpetrated with the sub-prime crisis. The reality is that although the property bubble has ended in Spain, and there have been some reductions in prices, those reductions do not in anyway reflect the dire state of the economy or the property market. In fact, there is an incentive for the Banks and other finance houses to perpetuate fictional valuations of the property on their books, so long as they can use it to provide a pretence of economic strength, and thereby to continue drawing money from the ECB's funding arrangements. But, sooner or later, the dam will burst on that, and the pretence will collapse. When it does, there will be a rush to get rid of that 1 million empty properties at almost any price, and the assets on the Spanish Banks' books will no longer look very safe. That may not affect the big Spanish Banks like Santander, which operate on a global basis, and have very profitable operations in Latin America, but many of those small cajas that have provided the loans for the property bubble, and which the Spanish government is trying to shore up with mergers and other measures, will be seen to need massive recapitalisation.

That is likely to be on a scale much greater than the recapitalisation of the Irish Banks, and the question is, at a time when the Spanish State is itself facing increasing questions about how it can sustain its own sovereign debt, where will that recapitalisation come from? Its possible that the big Spanish Banks might step in, but the experience of the Finanical Meltdown, shows how easy it is for even solid banks to land themselves in big trouble by taking on the unknown debts of others.

In the meantime, the actions of the European political leaders resemble the moving of deckchairs on the Titanic, as they continue to combine attempts to deny the severity of the crisis with continued wrangling and attempts to obtain political advantage as the price of agreeing to any measure that might actually provide a longer-term solution.

Another Domino Falls

Ireland has eventually faced reality and formally asked for financial support from the IMF and EU. It was only a matter of time. It looks like they will get 15 Billion Euros to go to the State, and 80 billion Euros to go to bailing out the banks, or around 100 billion Euros in total. Most of this will probably come from the 750 billion Euro EFSF set up in the Spring, when the sovereign debt crisis erupted around Greece. Ireland is now the second domino to fall, and the hope of the EU is that this will provide a firebreak to prevent the next domino in the chain Portugal from falling. It seems a vain hope.

As I pointed out a couple of years ago when the Financial Meltdown began Where We're Going,

“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.”

We now have a zero-sum game in much of the global economy. Traders rarely make single bets. They usually work on the basis of what are called "paired trades". That is if the risk/reward ration for one thing has improved whereas for something else it has worsened, then they buy the former, and "pair" this trade by selling the latter. In that way, gains are maximised, and losses minimised. When Northern Rock was nationalised, it became one of the safest places to put your money, because all of its deposits were now guaranteed by the State. When Greece was bailed out, and its need to go to the Capital Markets pushed down the road, by its bail-out, the focus was shifted to the next country that lacked that facility – Ireland. Capital began to flow out of Ireland to the extent of 23 billion Euros, and was likely to increase. Depending on the nature of that settlement, pressure will be relieved from Ireland and be transferred to Portugal. It seems likely that this same procedure will be played out again, and then next in line will be Spain. If I were a Bond Trader, then as soon as it became obvious that Ireland was to be bailed-out last week, I would have been selling Portuguese debt across the yield curve, and possibly Irish Debt at the Longer end, and buying Irish debt at the short end of the curve i.e. Bonds due to mature in the next couple of years. The reason is simple. With the bail-out, Ireland will have no need to go to the market for the next couple of years. That alone means the Supply of short-dated Irish Bonds will fall, and the price will rise accordingly. Moreover, the bail-out means that there is no possibility of default on those short-dated bonds, meaning the risk has disappeared, and with it the risk premium on them. By contrast, Portuguese Bonds have become relatively more risky at all maturities. If the EU has to cover the lending to Greece, and Ireland through the EFSF, by borrowing istelf, then this debt coming to market at some point, will be very secure, and if I were a Bond Trader I might want to keep some reserves to pick up that debt. Finally, having seen that if the Bonds of a country are trashed enough the EU will come in to bail-out that country, thereby removing the growing risk that bondholders were feeling - particularly after Merkel's comments - then there is a massive incentive for Bond Markets to trash the next country in line, in order to force the EU to come in, and back-stop that risk.

I would expect that next week we will start to see already that the spread on Irish Bonds will narrow, and on Portuguese Bonds they will widen.
But, none of this provides any real solution, in fact, it compounds it. We have had 750 billion set aside in the EFSF, we have had a large chunk of that set aside for Greece, now we have another 100 billion set aside for Ireland, the figure for Portugal is likely to be a similar amount. The trouble is, a hundred billion here, and another hundred billion there, before you know it, you're talking about serious money! And that serious money is being drained from one pot only to temporarily fill another. The real solution is not to rob Peter to pay Paul, but to create more value in total. The trouble is that creating more value in the context of an economy needs an approach that is rather more sophisticated than the attempt to apply the principles of running an household budget that the Tories and the Right-Wing Populists want to use.

There are two basic things required. Firstly, the debts have to be monetised. In other words, the EU, just as with the UK and the US (the US has already been doing this with QE), has to print money to pay the creditors. Households can't do that without risking being sent to gaol for forgery, or passing a false instrument. But, printing money itself is not a solution. Paper Money itself is not Value, it is only a representative of Value contained in the Money Commodity – usually Gold - which itself can only circulate as value within the economy to the extent that it can exchange with equivalents. That is, real value is created by increasing the quantity and value of commodities circulating in the economy, more cars, TV's, machines and so on. In a Capitalist economy that only happens when the Capitalists believe they can make profits from doing so, a basic condition for which is that there is adequate demand for those commodities. The only point of the money printing is to work towards this latter requirement. By clearing the debts in the short term, it provides the basis for Money and Credit to circulate in the economy. But, that will only happen if people are confident to spend on consumer goods, which in turn creates confidence for firms to invest. At the moment that is unlikely because Governments like the Tories or their equivalents such as the Tea Party in the US, have scared the shit out of people with their narrative about how bad the situation is, how imminently devastating the deficit is, and how much pain people will have to suffer with Cuts and job losses as a response. The exact opposite is required, and without it, the consequences could be far worse than the picture the Liberal-Tories have been painting.

The fiscal stimulus that the last Labour Government had implemented was beginning to have the desired effect. Unemployment had not risen as much as the pundits were predicting, people were not being thrown out of their houses, and so on. Growth in the economy had started to increase, and as a result the deficit was actually lower than had been anticipated as taxes were higher and welfare payments lower. The same effect could be seen from the fiscal stimulus introduced in the US, in Brazil, in China, and elsewhere. What was actually required was a continuation of that fiscal underpinning of the economy to allow it to gain strength. Then the measures could be put in place to ensure that fiscal responsibility was restored under the more benign conditions of economic growth, and further measures could be introduced to encourage investment in those areas which offer the greatest potential for future development and competition.

What is standing in the way of that is right-wing ideological dogma. As I quoted recently a right-wing commentator in the US summed it up when he was discussing the demands of US Big Business for socialised Healthcare, and the resistance such a rational solution faced:

“The bigger hurdle may be stereotypes. Business's sensible drive to get Uncle Sam to take on more of the health burden will run into the nihilistic (but potent) "big government" rhetoric of the GOP--plus the party's delusion that we can keep federal taxes at 17% to 18% of GDP as the boomers retire. If Republican pols want to help Republican CEOs solve their biggest problems, this caricature of a political philosophy will have to give way to something more grown-up.”

Matt Miller in Fortune

The problem is that popular opinion is rather like an oil tanker, it does not turn on a sixpence. Years of neo-liberal propaganda have conditioned people into the belief that the State is bad, that there has to be balanced budgets and so on. Politicians such as those Miller is referring to, who have to get elected, cannot simply come out and change course if they want to get elected. The example of what has happened to Obama, is a clear illustration of what happens when they do.

As a consequence the domino's are likely to continue to fall, and each one will create a more deafening thud as it lands than did the last.

Is Ireland About To Go Bust?

The Irish Government, this afternoon, announced a tightening of its already draconian fiscal retrenchment. Having already proposed cutting Euros 3 billion from next year's budget, as part of a Euro 15 billion fiscal tightening, it now intends to double this figure to Euros 6 billion out of 2011's Budget, significantly front-loading the cuts.

As part of today's Budget statement, it announced that it sees GDP falling by 2% in 2010, but sees growth of 1.75% in 2011. Although this figure is lower than previous estimates, it is still highly questionable. Ireland and the UK's economies are closely linked with considerable trade between the two. Ironically, both the UK and irish Governments place an emphasis on exports as a means of providing growth, yet both governments are in a process of retrenchment that is likely to place severe limits on any potential growth from trade between the two economies. In the case of Ireland,it is likely to suffer a double whammy, because in addition to suffering its own knock-on effects from a reduction in UK growth following on from the UK Government's austerity measures, it is also going to suffer from a rapidly rising Euro, which is rising as the other side to a significant dollar weakness stemming from QEII in the US, and which saw Gold rise today by more than $40 an ounce!

The Euro is also rising because it is becoming clear that the ECB is pressing on relentlessly with its exit strategy from the monetary easing it introduced as a consequence of the Credit Crunch, and in response to the sovereign debt crisis that hit the PIIG economies in the Spring. Jean Claude Trichet, who is a fan of Austrian economics has an ideological bent towards the idea of monetary stringency. For some months now, the ECB has not been entering the Bond markets to buy up Government debt, which it began to do in the Spring. That is no doubt one reason that the Bond yields on PIIG economy debt has once more risen to those crisis levels.

At the ECB press conference this afternoon, one journalist from the FT asked Trichet, if the fact that the spread between yields on Irish debt and German Bunds was now as wide as that in the Spring between Greek Bonds and German Bunds, meant that Ireland would now have to be bailed out, in the same way that Greece had been. Trichet failed to answer referring questioners to the fact that the Irish Government would be making a Budget statement later in the day. He did, however, say that the Euros 15 billion of cuts already proposed by Ireland would not be sufficient to deal with its crisis! For now Ireland can get by. It does not need to go back to the international Bond Markets to raise money until next Spring. But, it is becoming clear that with the current - and rising - interest rates it is being asked to pay to raise money, it will not be able to raise money on international markets. It will be forced to either raise money through the EU facility, or else by going to the IMF. There seems little point in waiting until Spring to see if that situation changes rather than addressing this problem now. That is all the more the case given that it is not just ireland facing this problem. There is still a strong likelihood that Greece will have to restructure its debt - meaning it will effectively default on some debts coming due, and have to ask lenders to agree to roll over the payment date - and yields on the debt of Portugal are also rising. For now the pressure on Spain has reduced, but with more than 20% adult unemployment, and 40% youth unemployment, with an economy that was dependent on an inflated property market and construction that has collapsed, the resolution of other matters means that attention is now likely to turn back on peripheral EU economies like Spain. The more lenders fear one or more of these economies may default or restructure their debt, the more such a consequence is likely to show up the Bank Stress Tests as being a sham, the more slowing economic growth, and the pressures arising from a strong Euro, increase the likelihood of further bad debts being racked up by banks, the more those lenders will look to increase the risk premiums demanded, or else will begin to withdraw their funds from those dodgy economies, and look for safe havens in the Bonds of economies such as Germany and the US, increasing the yield spread even further, or will look to other safe haven assets such as Gold - one reason why it rose $40 today, and is forecast by some Gold traders to reach $2,000 (up 50%)in the next 6 months or so.

Ireland was one of the Tories poster children only a few months ago. They touted it as an example of the beneficial effects of cutting hard and fast. They don't mention it today. Its become like the mad relative kept in the attic. But, Ireland does provide an example of where the Liberal-Tory policies lead. They lead necessarily to an undermining of the economy, and the potential for growth. In so doing they undermine the very basis of resolving a debt crisis by sensible means, and instead lead to a self-reinforcing spiral of decline, whereby declining tax take and increasing expenditure raise the deficit, and cause concern in international Capital markets, and which in turn once that route has been started down becomes impossible to get out of, because a reversal of policy is seen as policy weakness and indecision. It is illiterate economics.

Liberal Re-Writing Of History

In interview after interview, Liberal spokesmen have responded to questions, about why they changed their position, over the Cuts, by saying that it was a pure co-incidence that their change of position was simultaneous with their negotiations, with the Tories, to get their grubby hands on a share of power. The real reason they changed position, they claim, was that the crisis, in European debt markets, so changed conditions that they had to change their position. Besides being economically illiterate, and unsupported, this also represents a re-writing of recent history.

Anyone, looking back, knows that their claims are simply untrue. For example, some time before the election, the situation in Greece, and the other PIIGS, was so severe that, even in April, I wrote a blog, which opened with the sentence "Greece has gone bust!", and featured a CNBC interview with Jim Rogers to that effect Beware Of Greeks In Need of Gifts. How bad did the Liberals need the situation to be before they felt that they had to change course??? Or are they so incompetent that they were unaware of what was happening in the European economy? What does that tell us about the confidence we should have in Comrade Vince?

But, its a re-writing of history for another reason. At the time the Liberals were involved in these negotiations, with the Tories, and claiming that the situation in Europe had changed, so significantly, as to require them to change their policy, I was in Spain, and watching things unfold at first hand. In that previous blog, I'd spelled out how the crisis could be resolved, through debt monetisation, and the establishment of a centralised European Debt Management Office, as part of a single European State, with control over Fiscal Policy. While I was in Spain, and at the time the Liberals claim this game changing event took place, the first part of that was what European leaders did. They announced a huge package of European aid, to bankroll the PIIG economies, to avoid the danger of immediate default, and the ECB announced that it would begin buying the Bonds of the PIIG economies i.e. monetising their debt, in the same way the Bank of England had done in the UK, and the Fed has started to do in the US. I was writing about this while I was away, but could only blog it when I got back, towards the end of May, in my blogs The Return Of Illiterate Economics. But, as I wrote in that blog, the initial response, to the announcement of the package, was that the Yield on Greek Bonds fell from 15%, to 8.5%. Stock Markets soared in Europe, and around the globe, and the Euro rose against the dollar. Why, because the monetising of the debt was precisely the solution that Global Capitalism needed, to avoid an immediate crisis, to provide breathing space, and to provide the basis for the long-term debt problem to be dealt with via restructuring and growth.

But, as I also wrote in that blog, a week later, all that had been dramatically reversed. Why? because the ECB had announced that it was sterilising the money, it had pumped into the economy, to buy Government Bonds, by withdrawing money through selling commercial bonds, it was holding, and because, partly as a result of pressure from Germany, who had resisted providing any assistance to Greece in the first place, the PIIGS were being asked to implement precisely the kind of fiscal austerity that would lead to their economies being cratered, and the potential for the very growth required to solve the problem undermined. In other words, the very policies the Liberals claim they had to change to, were precisely the policies, which had led to a big sell-off on European Markets - and then world markets - and the dramatic fall in the Euro! If anything the experience in Europe during that period should have led to the exact opposite of the conclusion the Liberals say they were led to. It should have led to the conclusion that what was needed was further Quantitative Easing, and at least no tightening of fiscal policy to ensure that this additional liquidity found its way into the economy!

But, even if none of that were the case, the Liberals argument makes no sense. As I wrote, in my blog, Britain Is Not Greece, and Britain had many options not available to individual Eurozone economies. For one thing, at the time, the yield spread between Greek Bonds and German Bunds was more than 12 points. By contrast between Bunds and UK Gilts it was only 2 points! There was a considerable chance that Greece might have defaulted on its debt - and that risk still exists, and has been increased with the austerity measures - but there is absolutely no chance that Britain is going to default on its debt, and the traders in the Bond and Currency markets, who are pretty savvy people, when it comes to not losing their shirts - know full well that there is no chance that would happen, which is why UK Gilt Yields were less than 4%, which is historically low - itself hardly a suggestion that the markets were going to refuse to buy UK debt, or push interest rates to unspeakable levels!

And the irony is that, in the intervening period, as a result of the austerity measures, introduced in the PIIG economies, the weak recovery, they had been experiencing, has been reversed, as a direct result of the Cuts, and, in consequence, just as borrowing had to increase, in Britain, in the 1980's, under Thatcher, as Tax revenues fell, and welfare payments rose, so the PIIG economies are facing a similar scenario, and as a consequence yields on their debt are now back almost to the level they were at in April! If the Liberals want to learn from the experience in Greece, then they should learn that lesson, that if the policy of Cuts was intended to reduce interest rates, it hasn't worked! All it has done is to increase misery, and make it more difficult to resolve the crisis through growth.

But, the Liberals are not that stupid or ignorant. They know that nothing really changed that justified them changing their stance of opposition to immediate Cuts. The only thing that changed was that, if they wanted to get jobs for themselves in Cameron's Government, they had to be prepared to sacrifice whatever principles they might have had, as well as sacrificing the jobs of hundreds of thousands of workers, and maybe more if the idiocy of this policy is persisted with.

How Robust Is The Recovery?

The flash figure for UK Q2, GDP blew the socks of estimates, coming in at 1.1% higher, as against forecasts of just 0.6%. The FTSE, however, fell on the day. Why? Firstly, the figure is not all it seems. As CNBC reported, much of the rise was due to a massive rise in Construction. However, as one contributor pointed out, not only did this figure partly reflect on the fact that in the first quarter Construction activity was depressed due to the very bad weather, but also, which not many commentators have picked up on, it also reflects the fact that the ONS have changed the way they calculate this figure.

All that being said, if you take out the Construction figure, you still get an increase of 0.7%, which is still better than forecasts. Given the period under review, it is testimony to the fact that the previous Government's policy of stimulus was working, just as it has worked in China, Brazil, the US and elsewhere. The problem is, as Paul Mason pointed out on Newsnight, a significant portion of that GDP growth came from that stimulus. The Government is now proposing to take away that very large part of where the growth came from, and under conditions where the UK's closest trading partners are taking similar actions that will contract their economies, where China is taking action to slow its economy, because it has been growing TOO fast, and where the US stimulus is beginning to unwind, and right-wing politicians in the US are taking their cue from Europe, and demanding at least no more stimulus, if not budget cuts. The GDP figure, is backward looking, nearly all the forward looking indicators are pointing in a definite downward direction. The effect of the Liberal-Tory Budget has been to severely dent confidence, because the most likely consequence is a severe retrenchment, and under those conditions no business is going to rush out to invest, which is the sole hook the Government's economic policy hinges on.

Worse still, is that the growth figure is a double-edged sword. It comes at a time when inflation is stubbornly high, and has confounded the bank of England's predictions for it to fall for more than a year. With loads of money washing around the economy, the level of increased activity that the GDP figure suggests, is likely to result in further rising prices. And, as I've pointed out previously, the inflation that will be imported from China, and the rest of Asia, along with the rising prices resulting from the Government's Budget measures on Vat etc., will push up prices even further. Already, Andrew sentence on the MPC is demanding that interest rates be raised to head off the danger of inflation. At the moment he's a lone voice, and is likely to remain that way. But, at some point unless the bank wants to risk hyper-inflation it WILL have to raise rates. Given their current level of just 0.5%, any rise will have a dramatic effect, on businesses borrowing costs, and on mortgages, which could rise 10, 20,30, or even 50%. No wonder the FTSE did not rise.

But, there was another reason the FTSE would not have risen, and that is that the European bank Stress Tests were not going to be released until after trading closed. Traders would want to see how that panned out before making any bets. In fact, the Tests were a bit of a con. As David (Danny) Blanchflower told CNBC. The one thing they avoided was the effects of a sovereign default, of say Greece on all or part of its debt. Yet, that is precisely what has been spooking markets for the last few months, and many economists believe is inevitable at some point! In fact, if some of the other factors included in the tests were to occur, its difficult to see how such a default would be avoided. Other than, as I have pointed out in the past, defaults could be avoided if the EU simply printed money to monetise the existing debts of Southern Europe. But, that would imply introducing all the other measures I have spoken about, effectively it means the creation of a single European State, the issuing of single EU Bonds, central control over Budgets and so on. It also means a Federal Fiscal Policy with massive amounts of redistribution from the centre to the periphery. With current political conditions, none of that seems very likely in the immediate future.

And, in the meantime massive problems remain in that periphery as Paul Mason sets out in his blog in relation to Spain. If as I've written elsewhere house prices in the UK need to fall by half or more, in Spain, with 1 million empty homes, and an economy that was built almost entirely on debt and property speculation, then with unemployment at 1930's Depression levels already, and more to come as a result of the austerity measures, house prices need to fall by more like 80 or 90%. In fact, under these conditions, and the same applies to Greece, Portugal, Italy and Ireland, then the last thing they need is austerity, because the only way they could deal with the debt, the only way they could rebalance their economies away from the previous dependencies, is through growth. Instead they are going to get recession and deflation.

To use David Blanchflowers phrase if the PIIGS could fly, then Europe's problems could be resolved. If instead of a fiscal contraction they could get a major fiscal boost then the existing liquidity already in the system, would begin to be taken up. Some of the construction firms that have almost completely stopped working in Spain and the rest of Southern Europe, could get work, building not more houses, but roads, schools, hospitals etc., and could provide jobs in the process, which would have a rapid effect on stimulating aggregate demand. In the meantime, it would mean that breathing space would be provided to expand investment in other industries. Spain has been developing alternative energy systems to take advantage of its plentiful sunshine. Investment in these industries could provide the basis of a significant export industry rather than reliance on Tourism – which is likely itself to be undermined in the future as Asia, and Africa become developed as tourist destinations. But, such development could also ensure that the rest of an integrated European economy had markets for investment and sales too. Without it, EU trade is likely to contract, and Europe is likely to catch a bad dose of Swine Flu from its PIIGS.

Feeling The Pain

Greece is an emblem for Europe. It is the problem facing European workers writ large (and to an extent European Capital). The living standards of many Greek workers, and even small business people, were not particularly high to begin with, but it is clear that the standard of living as a whole, the cost of a bloated Public Sector, and pensions and retirement packages for some that would be generous even for a much richer country, could simply not be sustained. Yet, its not clear that its possible to easily remedy that situation quickly. The rest of Europe, with the possible exception of Germany and some small Scandinavian countries, faces essentially the same problem.

The problem is an inevitable consequence of globalisation, a consequence which is historically progressive, but which will be extremely painful for Western workers who have enjoyed almost two centuries of rapidly rising living standards. As I have written before, that globalisation is part of the historic mission of Capital as Marx described it, that proceeds via a process of combined and uneven development. It is the means by which millions of human beings are rescued from poverty and “the idiocy of rural life”. It is the means by which a global working class is created, the revolutionary force that will establish Socialism as a global system. That process was already well under way in the 1980’s, and was facilitated by the end of the Cold War.

It enabled Western Capital to respond to the problem of a low rate of profit by relocating production of mature products, requiring mostly unskilled labour, in low wage economies, often in Greenfield sites, and specially created Enterprise Zones that offered all of the protections of a Capitalist State, but also the kind of transport and other infrastructure that had previously only been available in developed economies. But, this process also saw, in Asia in particular, a strong growth of domestic Capital too.

During the 1980’s, this process of “de-industrialisation” of developed manufacturing economies went alongside the rise in unemployment of traditional organised industrial workers that enabled Capital to defeat organised Labour. But, alongside it went social unrest that was destabilising. Western Capital produced a compromise. Large numbers of workers were drawn into low or unskilled jobs in retailing, distribution and services on new developments, built on old industrial sites. They were low-paid and badly organised, but the effect on workers living standards was disguised by two factors. Firstly, many of the things these workers bought as consumer goods – and which they sold, distributed etc. in their new jobs – because they were now coming from new, efficient, up to date factories in Asia using very low paid labour, were available at very much reduced prices. Secondly, the second half of the 80’s saw the Tories introduce the Financial deregulation, which, alongside the same process in the US, was ultimately to lead to the Financial Meltdown of 2007-9. Together with a policy from that time on of loose money, it meant that people who previously would have been denied access to credit, became now the target customers – hence all those inane TV adverts advertising credit to people with no possible means of affording it, or like those fronted by people like Carol Vorderman, offering people already drowning in debt the prospect of a lifeline by taking on even more, over even longer periods. Of course, unlike Governments, individuals cannot simply print money to pay back those debts. In addition, the Tories financial deregulation meant that the age old rules about how much money could be borrowed, for example for a mortgage, were scrapped. Where previously you could only borrow two and a half times combined income for a mortgage, it became common for people to be offered up to six items combined income, and frequently on bogus income figures to boot. The consequence of throwing so much money into demand for assets such as housing, which are fairly limited in supply was obvious, prices bubbled up. That in turn meant that those who had houses appeared to become wealthier, as their main asset was now worth double what it had been only a couple of years before, and on that basis, some at least, borrowed even more using it as security. Of course, it was a nonsense the real value of the house was no different than it had been before, a fact that was quickly demonstrated in 1990, when the bubble popped and house prices fell by 40%! People should have been forewarned, because in 1987, a similar bubble caused by the same factors had led to the Stock Market bubble popping with share prices falling by 25% at a stroke, and along with it the value of all those personal pensions the Tories had encouraged people to take out. The real problem for Britain and most developed economies has not been Public Sector debts, but a ballooning Private Sector debt over the last 25 years, as people were encouraged to borrow recklessly.

But, that encouragement was no accident. It was the means by which Capital pulled off the trick. One the one hand this fictitious wealth meant workers did not notice that in storing up all this debt they were not becoming wealthier whatever the paper value of their houses, but poorer. It also meant that as the thought they were becoming wealthier, they also felt they were becoming more affluent, because the same debt, the same loose money, alongside those cheap imported goods, meant that they could go out each week and buy some other piece of ephemera. All the time they were led to miss out the fact that their real wages were standing still. Not only did it buy them off, but it also gave Capital a breathing space. Capital employed in retailing, distribution etc. got to share in the Surplus Value being produced by all those workers in Asia. Capital employed in Finance created new Surplus Value through the production of new financial products sold to consumers, and also shared in the Surplus Value of others – in Asia or elsewhere – through its traditional role as a provider of Money Capital.

During the period of the Long Wave downturn, throughout the 1980’s and 90’s, although there were repeated sharp recessions, these measures meant that unemployment and the destruction of Capital never reached the kinds of levels of the 1930’s or previous Depressions. In so doing, Capital was able to avoid the kind of social instability of the 1930’s too, and the political costs and risks that went with it. But, there were consequences. One function of such crises is to destroy Capital in those areas where it has been over-accumulated, and, thereby, to lay the basis for it to move to those areas where it can be more effectively used, where the Rate of profit is higher, which also means it can afford to pay higher wages. This process was never thoroughly accomplished. In the US, in particular, huge monopolies like Ford, GM, and Chrysler, which not only many workers relied upon, but on which many other industries depended, were able to keep much of their production going, solely because of their dominant position, state support, and the huge Balance Sheets out of which they could fund losses. But, many of these too also kept afloat by diversifying into the provision of finance.

The downside of that was that the Capital that might have otherwise gone too higher profit areas e.g. in developing new forms of energy and technology, remained locked up. The other side was the effect in relation to Labour. In the 1930’s, in the areas of chronic unemployment, workers were prepared to do any work almost at any wage. Workfare schemes were introduced in exchange for Dole. Of course, as an answer to the demand for such schemes today, and to those who believe that markets automatically clear, none of this led to unemployment falling or to the markets clearing. In the 1980’s/90’s, as part of the price of maintaining social unrest within limits, Capitalist States, despite some posturing by politicians, actually extended Welfarism. The consequence was that, amidst quite high levels of unemployment, it was unable to adequately recruit to some of the lowest paid jobs that still needed doing. In both the US and UK, in particular, these jobs were frequently done as part of a black economy. Either they were done by people who were claiming Benefit, and did them to top it up, always risking being caught, or else they were done by illegal immigrants. In both cases those doing them were often putting themselves at risk, and were being super-exploited by employers, because being illegal in both cases, none of them were covered by employment protection on wages, or Health and Safety. Even where they were not done illegally, they were often done by legal migrants on very low wages, and in poor conditions.

In both countries, agricultural work is a good example. Unable to obtain sufficient domestic labour, growers brought in foreign workers. The argument some have used that the growers should have had to pay higher wages to attract domestic workers is spurious. It is, in fact, no different than the argument as to why Capital went abroad to find cheap labour. Had domestic growers paid higher wages, then the prices of produce would have to have risen. Otherwise, growers would not have made a sufficient return on their Capital, and would not have risked it. They may well have simply invested that Capital abroad where they could obtain sufficient cheap labour with a consequent economic loss for the domestic economy both in terms of the loss of demand from the incomes spent by those workers, the loss of tax revenues etc., and from the fact that those products would now have to be imported! Worse, had they raised prices to compensate then they would have found themselves driven out of the market anyway by cheaper imported produce.

And, herein lies the problem. In a globalised economy, the market for Labour and the Value of Labour Power, is increasingly being set at a global level. In terms of its effect on millions of workers around the globe, whose standard of living lags a long way behind that in the West, that is a massively progressive development. For Workers in the West, however, it will be a painful readjustment. Some economies, like Germany, possibly show the answer – not just here and now under Capitalism, but for the foreseeable future under Socialism too. In order for workers, in the West, not to experience a dramatic fall in the value of their Labour-Power, the nature of that commodity has to change. Exports account for more than 40% of Germany’s GDP. Despite being a high-wage economy, with a good social-wage too, Germany does not appear to have great difficulty competing on a global scale. Until recently, it was the world’s largest exporter. That was true even when the Euro was rising sharply against Asian and other currencies. In part, that is due to a longstanding commitment to investment that meant large amounts of Capital stood behind each German worker. But, also, in large part, it is due to the fact that Germany has focussed on the production of high-value/high quality products. Instead of competing on price it competes on quality. How long such a strategy is possible is hard to say. How quickly, such a market place would become crowded, if other Western economies pushed a similar strategy is even more difficult to assess. For one thing it depends on the range of new high-end products that can be developed. For another, it depends upon the extent to which new markets in Asia and other developing economies grow to absorb such products. VW, for example, already sells more cars in China than it does in Germany. It also depends on how quickly developing economies themselves move into this high-end production. The US has had more than ten years since the commencement of the new LW boom to have been moving into high-end areas such as Green Energy production. It is beginning to do so, but so is China! Already, many Asian Tigers, not to mention China, are exporters of Capital to even lower wage economies, as they have been gradually moving their production up the value chain. China, in particular, is pumping quite huge sums into the developing African Lion economies, not just in deals to secure oil and minerals, but also developing the necessary infrastructure, and production that marked the beginning of the development of the Asian Tigers.

I suspect that for workers in Europe the process will be very uneven, and in part will depend upon the degree to which the EU economies hang together as a bloc, or hang separately by descending into rivalry. Gordon Brown was almost certainly correct in his repeated statements during the election campaign that any workers who do not equip themselves with sufficient intellectual skills will suffer badly. Those who do equip themselves may, at best, see only modest improvements, though this may be masked by a continuing cheapening and widening of the range of products. There may also be a reversal of another phenomena that has given rise to discussion. The last 20 years or so has seen repeated inflations of asset prices, as set out above. For workers who bought their houses 30, 40 or 50 years ago, that has given a huge boost to apparent wealth – for some it has also meant a boost to real affluence, because the wage-price inflation of the 60’s, 70’s, and 80’s, meant that Capital sums on mortgages were inflated away, providing almost free housing costs for those who used that to pay off their mortgages. In contrast, it has placed a huge burden on those buying in the last 10-20 years. There have been corrections. In 1990, house prices fell by 40%, but by 1996 they had recovered, and have risen sharply since. Even with the last correction, during the Credit Crunch, prices only retreated marginally. I have just been looking at property in Spain, and decided against buying, at least for now. Prices have fallen, but nowhere near enough given the economic realities.

Spain is one of the PIG or Club Med economies being targeted by the markets. I can remember even as short a time ago as in my late teens and early twenties, things in these countries were much different than they are today. It has to be remembered that at around that time when Greece was ruled by a Military Junta, Spain and Portugal were ruled by Fascist dictators. Spain’s economy has grown considerably sicne then as a result of EU membership, but, in large part it has grown by attracting tourists and northern European buyers of homes in the Sun. The other Club Med economies are the same, which is why whereas exports account for more than 40% of Germany’s economy, they account for only 20% or so of the GDP of these economies, despite their lower wages. It is why the fall in the Euro is not any great benefit to them. Huge numbers of people in Spain, in particular, were employed in construction, building these homes, as their prices rose in a classic bubble. Like all bubbles, such as John Law’s Mississippi Scheme, its closing stages were marked by an attempt to keep it going by building in less desirable areas like the scrub and desert areas, where prices could be kept lower. That bubble has stopped inflating but has not popped. It has left tens of thousands of construction workers without jobs. Spain is still in recession and probably suffering deflation. Even before the latest cuts programme was announced by the Government, unemployment stood at over 20%, which is Depression levels (over 40% for Youth Unemployment). During the 1930’s the level of property prices fell in some case to just 10% of their previous level. Other asset bubbles when they have burst have shown similar falls – the NASDAQ, which listed mainly Technology shares fell by 75% in 2000, when the tech bubble burst. At the moment some sellers in Spain are holding out still hoping to sell at prices higher than they have paid. That is not sustainable. Although, Keynes wrote that markets can remain irrational for longer than investors can remain solvent, its also true as Warren Buffett points out that as a buyer you do not have to buy an investment if you don’t see anything worth buying. Its far more likely under the current economic conditions that it will be the sellers not the buyers who will become insolvent first.

A fall in house prices in developed economies might then mask some of the fall, or sluggish growth in wages by means effectively of a shift in wealth from existing home owners to future home buyers. That will be more so if, as I expect, the massive amounts of liquidity, pumped into the economy, leads to a significant rise in commodity price inflation and nominal wages. What is clear, is that, in respect of workers in developed economies, the kinds of arguments that the Left has put forward in the past, will be even less relevant than they have been in the past. As I pointed out recently, in relation to Greece, even a Workers’ State cannot simply re-write the laws of Economics. Workers will have some benefits if they can create their own Co-operatives in areas of production, which enable them to compete in a global market. But, in that global market, the problems that workers face will increasingly be resolvable, at least, only on a Continental basis. Calls simply for more state intervention, for more militancy and so on will completely miss the point. Defensive actions through the Trade Unions will be necessary, but not enough. Political action, especially to demand common standards across Europe will be necessary, but unlikely to be granted unless workers are first in a stronger position. Demands for international wokers unity and solidarity and common organisations in Europe, are undoubtedly correct, but unlikely to be established for so long as the very working of Capitalist competition is a more powerful force dividing workers from each other.

In reality, as I have argued elsewhere, building Workers Co-operatives is a means of getting round that. A National Co-op Federation can easily join together into a European Federation. The same economic forces that drive Capital to combine in monopolies, cartels and trusts, would impact on workers as owners of the means of production too. And through such combination in these Co-operative Federations, Labour that is not Labour, Capital that is not Capital, to use Marx’s terms in the Grundrisse, will increasingly demonstrate to Labour that is Labour the immediate benefits of doing so themselves. If we are to build workers unity we have to begin to do so on our terms, on the basis of our property forms not on the bosses. On the basis of the former it can be a basis for advance, on the latter only at best for defence.

Gold Glisters, Paper Binned

I've been pointing, out for a while, that the solution, to the Debt problems of the EU and UK, will be resolved in the same way that the debt problems of the Banks were resolved - by monetising the debt. That is, Central Banks will simply print money, and use that Money to cover the Government debts. Its what Governments have done from the very first use of money, and the very first creation of debts from borrowing it. In the past, they corrupted money made from precious metals, then they started to simply issue coins that contained less metal, but which retained the same names. Marx speaks, for example, of how the pound sterling, which had begun life as a pound weight of silver, had, by the 19th Century, been reduced to only a fraction of that weight. Once paper money is introduced, as a token representing money, there is virtually no limit to the amount Governments can print of these tokens. As Marx points out, real Money - Gold Silver or whatever has arisen as the Money Commodity - circulates because it has Value. Paper Money, however, only has Value because it circulates. The Value of Gold or silver is determined by the labour-time required for its production. But, paper has very little value because it requires little labour-time to produce. Paper money tokens only have value because they act as representatives of this real money. But, for that reason, the more of them that are printed the less value they have, whatever the nominal value they have. Their real value becomes manifest in exchange in the fact that more of them have to be given up in exchange for any other commodity - inflation.

I've been pointing out that not only is the monetising of the debt the obvious solution - the drastic curtailment of Public Spending to reduce the debt is not in the interests of Capital at the present time in Greece or in Britain - but the drop in the value of the Euro indicates that the markets realise that, and that such a monetisation is inevitable at some point. The other day, I heard a currency dealer on CNBC making the same point. The proposed cuts in Greek spending, as part of the rescue package, are predicted to lead to a fall in Greek GDP of 3% for this year. Other countries, amongst the PIGS, such as Portugal and Spain are also now coming into the firing line, and similar austerity measures have been put in place to reduce their debts, with a similar consequence for growth.

But, the EU is a single market, a single economy. Most EU states conduct most of their trade with other EU states, the biggest Capital flows are from one EU state to other EU states. In good times, this is a powerful driver of economic growth, but you can't have the good without the bad. Economies like Germany, dependent on exports for a large part of their GDP, will suffer if many other areas of the EU not only remain in recession, but are driven even further into recession by swingeing cuts in spending. Gordon Brown is right, when he says that the EU needs to adopt a strategy for economic growth, as the means of dealing with the debt, but the first stage of that strategy has to be to begin by monetising the debt now. Once growth has taken hold again the problem of dealing with the inflation that results from that can be addressed.

But, such a policy of monetisation will result in inflation down the road. It is already leading to a fall in the Euro, just as the massive increases in liquidity from printing dollars over the last few years have led during that time to big falls in the dollar. The same has been true for the pound, and other major currencies, like the RMB and the Yen, have been held down because of policies in China and Japan to print money to keep their currencies pegged or within tight limits against the dollar. But, it follows, that if all paper currencies get binned in this way as a result of printing more paper, the relative values of each will not change that much. That is true, but those currencies are not just valued against each other. As stated above they are valued, each time they are used, in exchange against other commodities. Print more pounds, and more pounds have to be handed over for each sack of potatoes, and so on. More significantly, still sitting in the background, are those Money commodities, those ancient economic relics of Value, on which these money tokens are based, and against which they are supposed to bear some lingering relationship.

Since 1999, Gold has risen, from a low of $250 an ounce, to its current price of nearly $1200 an ounce. It has merely, matched other hard commodities such as Copper in that rise, which is part of the usual Long Wave cycle, during which raw materials rise sharply in price at the beginning of a new Long Wave upswing, as demand rises sharply, which cannot be met due to years of underinvestment during the downturn. In the last Long Wave upswing, from 1949 to 1974, Gold reached its real peak against other commodity prices in 1960. But, between 1970 and 1980, Gold rose from a price of $30 to over $800 an ounce!!! Some people, the so called Gold Bugs, who had invested in Gold during this period, made absolute fortunes, and the same people have been buying Gold again over the last few years.

But, the reason for the near 30 fold rise in Gold prices during the 1970's was due to inflation, because of the massive printing of money, to cover the Vietnam War, and to cover the Keynesian policies, used extensively during that period, to try to stave off the cosnequences of the ending of the Long Wave Boom, and the onset of the Second slump. The rise of Gold, up to 1960, was a rise in its real exchange value, its price of production compared to other commodities. The 1970's rise was purely a rise resulting from inflation. Today, we see the two factors combined. Gold has been rising in price, alongside all other raw materials, as part of the normal Long Wave cycle, but the massive printing of paper money tokens, over the last decade, is very similar to those same policies during the 1970's. The consequence seems inevitable, as paper money tokens get trashed, real money, Gold, will soar possibly to as much as $5,000 to $7,000 an ounce! Good news for South Africa and Russia.

What is different, today, from the 1970's is that, in the 1970's, Keynesian policies could not work to prevent the effects of the Long Wave downturn, and were abandoned. The adoption of Misean economic polices, in Britain and the US, under the guidance of people like Frederick Hayek, led to a reversal of money printing and a contraction that led to mass unemployment. Only when Capital had decisively beaten Labour did people like Thatcher and Reagan switch to Friedmanite Monetarism that called for an expansionary Monetary policy, to stimulate economic growth, in the knowledge that prices could rise, whilst workers would be too weak to obtain compensation in higher wages. It was on that basis they defended profits, and at the same time created asset bubbles on Stock Markets, and in housing. Today, early on in a Long wave upswing, Keynesian polices CAN work. The task for Capital is to restart growth, growth which once underway will be self-sustaining due to the endogenous characteristics of the Long Wave. That has two consequences.

Printing Money in the 1970's, and its resumption at the end of the 1980's, led to inflation. The reason for that is simple. Inflation arises when more money is put into circulation than the volume of economic activity merits. In the conditions of the 1970's, more money in circulation simply led to firms raising prices, and workers seeking higher wages. It did not lead to more investment, which would have put more goods in circulation, to absorb the additional liquidity. Firms did not invest, because they had no confidence that things would improve. The result was stagflation. In the late 80's and 90's, when the Monetarists adopted a loose money policy, in order to smooth over the structural problems arising from increasing globalisation, amid a Long Wave decline, the result was that company profits rose due to rising prices with subdued costs, and workers sought to compensate not through rising wages, but through increased borrowing out of fictional rises in wealth that appeared to come to them without effort via their rising house prices - and increasingly, for many, rising values of their PEP's, Pensions etc. Although, the increase in liquidity DID result in rising prices, therefore, it did not result in rampant inflation, because a large part of the liquidity was used up in financing these rising asset prices, and, because that very same globalisation was resulting in masses of new low priced commodities coming in from China etc.

Today, printing money to monetise the debt will result in currencies being trashed against real money, will result, in the short term, in high rates of inflation, but, precisely because we are in a Long Wave boom, not decline, the resumption of growth will bring loads more commodities on to the market that will begin to soak up that liquidity, and thereby cap the extent to which inflation will rise. Growth will also create the conditions under which the initial costs of monetising the debt can be addressed. More people in employment with rising wages, will mean more tax in Income Tax, and in VAT as they spend more. Higher company profits will have the same effect, and less people claiming benefits of various kinds as employment and income rises will reduce State spending. but, those who have lost out, because having lent to the State, they find themselves paid back in funny money, will demand compensation. They will demand higher interest rates on the money they lend over longer terms. But, with higher income and tax the State will be able to pay these higher interest rates. Businesses, with increased activity and higher cash flows will not only be better able to cover higher interest rates, on longer term Commercial Bonds, but that higher cash flow will reduce their borrowing requirements, and higher incomes and profits will make it easier for them to raise Capital through share issues rather than issuing bonds.

Capital DOES have a fairly straightforward escape route from the current problems, if they choose to use it, and provided their political representatives can take the decisions to effect it - the biggest problem at the moment appears to be that Germany is baulking at resolving the Greek crisis, because of the political background of German elections. The Tories have committed themselves to spending cuts for similar reasons, because they believed it would win them votes.

I should stress that I am not, in any way, suggesting a crisis free Capitalism here. What I am suggesting is that the usual response of the Left, of wanting to present a picture of a Capitalism in terminal decline, in a state of perpetual crisis, is way off the mark even now. Even during a long wave boom Capitalism undergoes crises like the current one, and their will be more during this phase of the Long Wave Boom. But, it is necessary to understand the conjuncture, and to understand how these crises differ from those when the Long Wave boom ends, and those during the Long Wave decline. Without that its like trying to find your way using a compass that always points South, and without knowing where you are to begin with because you don't have a map.

Beware Of Greeks In Need Of Gifts

Greece has gone bust!



It is now dependent upon the kindness of strangers to bail it out. Or not so much strangers, but those who should be its brethren within the large family of the Eurozone. In reality, that means Germany, in particular, but also France. Ironically, the bail-out package involves contributions from other Eurozone countries Portugal, Spain and Italy, which also comprise the so called PIGS (Portugal, Italy, Greece, Spain) whose economies are also on their uppers, and facing problems financing their own debts! Already, Manuel Barroso has commented that his own country, Portugal, is not much worse off than Greece in this regard.

What this demonstrates is the contradictions of modern imperialism as I set out in my blog imperialism & War. Capitalism develops through a process of combined and uneven development. That process is manifest even within a single economy, which is why in Britain we see rapid development in the South-East, and sluggish development in the North-east. Before the development of the nation state, these different regions would have separate economies, and measures developed according to their needs. But, the rapid development of Capitalism requires both a more extensive market for goods, and a more extensive Capital Market. It requires Capital to face similar conditions wherever it operates. That is precisely why the development of a single market goes hand in hand with the development of the nation state, and hand in hand with a single currency.

But, Capital is able, within a single currency area, operating within a single state, to use fiscal measures to offset the contradictions that arise from a single currency, and single interest rate policy conflicting with different rates of economic growth, different rates of inflation etc. In the US, the Federal Budget has taken on an increasing role in fulfilling this function, whereas originally it was each state that was supposed to regulate its own economy via fiscal policy. In Britain too, the fiscal powers of Local Government were severely constrained, whilst the intervention of the central state in providing local financing, in financing directly Education, Healthcare etc., and of directing economic development through the RDA's increased.

A global capitalist market requires a global state, and indeed Capital has moved to establish global state structures such as the WTO, World Bank, IMF and so on, and even through the UN. But, these structures are partial and can never truly fulfil the functions of a state, because they immediately come up against that process of combined and uneven development, and, in particular with the continuing interests and remnants of an Imperialistic system in which sections of Capital remained tied to domestic states, and where powerful nation states can continue to offer significant benefits to Capital that comes under its specific protection. Political structures do not necessarily simply develop to reflect economic realities, because in the real world human beings, and their own immediate self-interest intervene. In a world of economic giants like the US, European capital needed to expand beyond its own limited national borders and to create its own super state. But, Capitalism is not a conspiracy. although, this was in the interests of European Capitalists, SOME European Capitalists, some European citizens, did not necessarily see that it was to THEIR particular or immediate advantage. This is one reason why European integration has largely progressed by such a bureaucratic means.

Yet, the fact is now made clear that, without a European State apparatus, that can act as the "Executive Committee" of the ruling class, and thereby set common rules for all Capital throughout Europe, establish a level playing field, on environmental requirements, working conditions, benefits, pensions and so on, unless it can have, within its grasp, the kind of control of fiscal policy that nation states exercise, there can be no single market, or single currency. The current crisis is putting that necessity firmly on the agenda, at a time when the ability to win support for such a development is probably at its least likely. In reality, the cost of bailing out Greece, will be less for Germany, than was the cost to it of bailing out the East after reunification. That burden was undertaken at a time when it had been drained by the Second Slump of the late 70's and 1980's, and by the recession of the early 90's. Today, despite the last recession, Germany is in better condition to undertake that role. Without it, a collapse of Greece, threatens sending Europe into recession, and a collapse of the Euro. European Capital certainly cannot want that, but German people have different views about bailing out what they see as a spendthrift economy, especially given their own habit of saving.

The danger is that a bailout for Greece might prompt calls for similar bailouts for the other PIGS, whose economies are much larger. But, a collapse of Greece, its withdrawal from the Euro, would almost certainly have a cascade effect on the other PIG economies, and would stimulate a crisis of confidence in the Euro itself. The current bailout of Greece is almost certainly not enough, they will be back for more. But, it is not at all clear that such support cannot stem the flood. In 1976, Britain did not need to go to the IMF for help, but did so, because it enabled the Labour Government to throw responsibility for the cuts on to external agencies, and to frighten off opposition by hyping up the seriousness of the situation beyond what it was. The same may be true in Greece, a combination of carrot and stick to lessen the immediate effects in order to buy time, and spread the cuts out over a period.

Moreover, although the other PIG economies are much bigger than Greece, this does not at all mean that the scale of bailouts would have to be proportionally bigger. As bigger economies, they are able to shoulder themselves a bigger burden of debt, so any financing only has to be sufficient to enable them to get through the current situation. Given that growth is returning to the world economy - China grew by 12% in the last quarter! - the answer to this debt is clear. Moreover, as I said in relation to the question of British debt Paying for the Crisis the certainty of inflation resulting from the massive amount of money printing, will itself resolve the debt crisis by shifting the burden from debtors to creditors, as it has so frequently been the case in the past. In Britain, as I forecast, inflation has already started to rise, even whilst economic activity remains subdued. I suggested that it would be by the end of this year before inflation really picked up, and I would not be surprised to see it close to twice its current rate by that time, despite the assurances of the Bank of England that it will fall.

But, making any kind of prediction is becoming more difficult, due to the number of exogenous factors, that can so easily combine to bring about a crisis - the crisis caused by the volcanic eruption is just one example, what might happen if the Tories do cut spending early on is another.