Crisis in the Eurozone: how deep does it go?

The debt crisis is Greece is the only the most severe case of government debt problems across Europe. Noe Wiener explain how the problems have built up and why they threaten to tip the world economy back into recession

Right-wing columnist Paul Sheehan claimed in the Sydney Morning Herald that Greece and particularly Greek workers have been laid low by their decadence. This rhetoric is pushed around the world: that Greek public servants are overpaid, that the public sector overblown, and that the working class are incapable of inhibiting their crude instincts to consume today instead of saving. Not only do such accounts simply push nationalist agendas to divide workers across Europe, they are also singularly incapable of explaining the current crisis. The Greek crisis is just as much about the rest of the Eurozone, and indeed the capitalist system, its structural imbalances and its class conflicts.

Origins of the debt
Greece has been under attack for its high level of government debt. But this debt has been central to the European market. Germany, the most powerful economy in Europe in terms of productivity and output, relies on exporting its goods, especially to other countries in Europe. German expansion has relied on the accumulation of debt by other European states—like Greece, as well as Portugal and Spain—to pay for its goods.

This problem has been exacerbated by the euro currency, which has enforced not only high Exchange Rates, but also a region wide race to the bottom. Poorer countries attempting to compete with German exports, have had to squeeze workers living standards. While wage rates in Greece have grown faster than in Germany, they still grew much slower than productivity. Far from the lazy luxurious lifestyles the mainstream media would like us to believe, Greek workers, like all those in Europe have been under constant attack.

Following the 2007 stock market crash, a number of European banks faced collapse. State spending provided the bailout in numerous stimulus packages. Greece spent €28 billion propping up its banks. Poorer states increasingly saw their debts spiraling from the bailouts. This had the effect of shifting debt from the private sector and the banks into government hands. These countries attempted to refinance their debts on financial markets, but the money markets demanded increasing costs to do so. This could have resulted in Greece being unable to repay its debt.

The same problem of large government debts and problems in their continued ability to borrow exist in Spain, Portugal and Ireland and potentially even the UK.

Bailing out Greece
A default on any of these debts would have had massive implications for the rest of Europe. Much Greek state debt is held by French and German banks, which have lent heavily to many of the poorer EU countries. Therefore a default in even the relatively small economy of Greece would have ramifications throughout Europe. This becomes much more serious when Portugal and Spain enter the picture, with foreign bank exposure to the three countries amounting to €1.2 Trillion. Thus the bailout for the Greek state is a bailout for the French and German banks, to stave off further financial crisis.

The bailout plan demands that Greece reduce its debt by cutting government spending and increasing the competitiveness of Greek exports.
Public sector workers are being laid off or having their wages cut. Pension rules have been toughened and there has been a hike in the Greek GST and indirect taxes. Many public services are about to be privatised, with the government promising to raise $US 3.7 billion through these deals. These, and possibly further attacks, are designed to create unemployment and lower wages in the hope of making Greece competitive in the Eurozone.
The fact that Greece is a part of the EU makes it harder to escape its debt problems. Most countries would also devalue their currency, and thus lower the value of their debts and increase the global competitiveness of exports. This is not open to Greece as it shares the common European currency, the euro.

Austerity across Europe
Cutting government spending will slow growth in the Greek economy. The economy is expected to shrink by 4 per cent this year and this contraction is likely to continue. This will increase the debt problems because it will lead to declining tax revenues. This solution ignores the importance of maintaining consumer demand. What is needed to maintain demand is government stimulus to the economy. All countries cannot simultaneously pursue the strategy of reducing their home demand and adopting an export-orientated economy to drive growth.
The aim of boosting the competitiveness of the Greek economy by driving down wages cannot be easily achieved. Greece already has much lower wages than the core EU countries Germany and France. These measures do not make Greece competitive, they merely condemn the working class to years of falling wages and unemployment.

The measures will not solve the problem. Under the austerity program, debt is expected to rise from 115 per cent of GDP to 149 per cent in 2013. The crisis will, at most, be postponed.

Similar remedies are being demanded in the other European countries with debt problems like Spain, Portugal and the UK. Spain’s economy shrank by 3.9 per cent last year, and unemployment is running at almost 20 per cent. But austerity measures including a 5 per cent cut in public sector pay, a freeze on pensions, the removal of Spain’s “baby bonus” were announced in May. Portugal has cut unemployment benefits by 15 per cent and increasing its GST. Britain is also planning to announce savage cutbacks to government spending.

The crisis also has implications for the stronger European economies. After first agreeing to cover the cost of Greek debt, the rest of the EU were then forced to come up with a new rescue package to stop a collapse of the Euro currency and shore up the debts of Spain and Portugal. In May the European Central Bank agreed to buy up Spanish and Portugese debt and announced a stabilisation fund of €750 billion.

Simultaneously the EU is attempting to more strictly enforce the 3 per cent of GDP cap on government spending, which is supposedly a condition of membership of the EU. Bearing the costs of the bailouts means the stronger European economies are being forced to cut spending in their own domestic economies. For example the German Chancellor Angela Merkel has just announced plans to cut local government spending, raise health care costs and cut unemployment benefits.

However, with stagnating investment and rising unemployment, economic stimuli through government spending are desperately needed to fuel the capitalist system. The cuts being implemented across Europe threaten to tip it back into recession. The shockwaves may even trigger recession globally. These fears were expressed in a letter US President Barack Obama wrote to G20 club of rich nations in July, warning against scaling back government spending.

If economic growth in Europe slows, Germany and France will face increasing difficulties in guaranteeing that countries like Greece don’t default. And with the crisis spreading to larger economies such as Spain, which makes up 8.8 per cent of European GDP, a default there would send huge shockwaves throughout the system.

The 2008 financial crisis is far from over, with the Greek problems spreading across Europe.

What is clear is that the solutions being pushed rely on attacking workers across Europe. Many Greek, and increasingly Spanish and Portuguese workers have understood this. Greece has had four General Strikes already this year with more planned, and Spain a two million strong public sector strike in June. These workers are refusing to pay for a crisis they did not cause.

There needs to be a broad struggle demanding that cuts be targeted on the rich rather than the poor. Corporate welfare needs to be cut and business and high income taxes need to be increased. The banking sector must be nationalised not bailed out. Now is the time for a people’s Europe, not a European Union at the service of capital.

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