Euro crisis tipping the world back into recession

Political and economic turmoil is engulfing Europe. In the space of a few days in November the governments of Greece and Italy fell after the financial markets judged them incapable of tackling the sovereign debt crisis.

Europe is now effectively being run by a cabal including Germany’s President Angela Merkel, French President Nicolas Sarkozy, and the heads of the IMF and the European Central Bank (ECB).

They first forced Greek Prime Minister George Papandreou to resign after he made the mistake of announcing a referendum on austerity measures. This panicked the markets with the prospect that Greek workers would vote it down. So much for democracy.

Then in Italy, Silvio Berlusconi was forced from office. Despite his professed love of the free market he was, “incapable of agreeing on, and then steering through parliament, the necessary measures” as the Economist put it—in the form of deep enough austerity cuts to please the markets.

Both were replaced by so-called technocratic “governments of national unity”, in a blatant effort to override democracy and ensure both countries deliver even more savage austerity measures. The new Greek Prime Minister, Lucas Papademos, is a former vice-president of the ECB, while Italy’s new leader Mario Monti is an economist and adviser to Goldman Sachs who used to be an EU Commissioner.

New wave of panic
The trigger for the latest round of panic is the spread of the sovereign debt crisis to Italy. Interest payments demanded on Italian government debt have reached 7.5 per cent, above the level that required the bailing out of Greece, Ireland and Portugal.

Once the interest payments required on government debt get that high the worry is that the debt cannot be repaid and will spiral out of control. Italian government debt, at almost €2 trillion, dwarfs the size of Greece’s €330 billion—and is far too large for a complete bailout.

If the Italian government becomes unable to repay its debts and is forced into a default, effectively declaring itself bankrupt, it would drag down banks across Europe, leading to a cascade of bankruptcies across the financial system.

French banks, with large holdings of Italian debt, are particularly at risk, leading to fears France will lose its AAA credit rating.

Economists insist that Europe can still find a solution to the debt crisis, if Germany is prepared to pay for it. Across the EU as a whole, the level of government debt to GDP is lower than in the US or Japan. Sufficient action now could still prevent a disastrous Italian default on its debts.

But France and Germany, backed by the European Central Bank and the IMF, have been unwilling to release the necessary funds without ironclad guarantees they will be repaid. They have released bailout funds only in small doses, provided the governments of Greece, Ireland and now Italy impose sufficient budget cuts.

This has meant that so far they have been unwilling to release the funds necessary to solve the debt problems, eighteen months after they first emerged. The supposed once and for all fix announced at the end of October has already failed. It planned to increase the size of the EFSF bailout fund, by using €250 billion of funding to “leverage” €1 trillion in funding through issuing yet more debt. But the money markets would not even buy the first €3 billion of debt the European Central Bank tried to offer.

The euro crisis threatens to drag the whole world economy back into recession. European Commission President Jose Manuel Barroso warned of a crash that could wipe out half the value of the European economy. Professor Simon Johnson, a former IMF chief economist claimed the world is, “looking straight into the face of a great depression”.

Already the European Commission has downgraded its estimates for growth in the Eurozone in 2012 from 1.8 per cent to an anemic 0.5 per cent. Italy’s economy is tipped to grow by just 0.1 per cent.
The austerity being demanded of governments will cut the prospects for economic growth further, depressing consumer demand as workers lose pay and their jobs.

“The scale of cuts they are talking about is staggering and would involve tremendous sacrifice from workers. Some 60,000 civil service jobs are under threat [in Greece]”, according to Greek socialist Panos Garganas. Greek workers staged their largest general strike since the crisis began at the end of October, with close to a million joining strike rallies across the country.

A new wave of resistance will be needed to demand a solution that puts workers’ wages, pensions and living standards first—not the bankers’ balance sheets.

By James Supple


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