10 May 2010
Raphie de Santos (Left Banker)
The European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF) have put together a 750 Euro billion bail out package to try and avert what would be the second leg of the great financial crisis and a double dip recession which could lead to a depression world wide. The package was designed to stop a further meltdown in financial markets after a week of losses which have not been seen since the Lehman’s crash of September 2008.
At the root of the crisis are the mounting deficits being run up by the developed countries of the world while their economies remain weak. Particularly, affected are those economies which were most exposed to the property and financial bubble and have weak manufacturing bases. These economies hid their fundamental weakness by swelling public spending to create jobs based on borrowing money cheaply on the international bond markets by issuing government bonds. But as the credit crisis turned into a recession and government spent hundreds of million of dollars bailing out their financial system and trying to pull their economies out of recession by massive stimulus spending these deficits ballooned to unmanageable levels. These deficits continued to grow as the world entered its worst recession since the 1930s depression meaning that government revenues on collected taxes fell while spending on social benefits went up.
When countries within the European Currency union run into trouble either renewing these loans or asking for new loans to cover annual deficits they will be able to turn to this fund. But like Greece to gain access to this money they will have to agree to massive cuts in public spending, wage cuts and rises in taxes. These draconian measures will have to be imposed against the will of the majority of the population so the bailout will only work if people accept these austerity measures. This is the great unknown. Of course the money for this fund will have to come from somewhere and that is us. The major developed economies will have to borrow money itself to fund the bailout leading to ballooning deficits in Germany, France, the US and the UK. The UK will have to make a contribution through the European commission and the IMF, the US through the IMF while Germany and France will have to contribute through ECB EC and the IMF. We will have to foot the bill through interest repayments or further cuts in public spending and tax rises. All this will help keep the world economy stagnant for at least a decade. The table below shows the scope of these loans that are required over the next five years if the current levels of deficits are not reduced and why financial markets want the deficits reduced . You can see that the 750 billion would not guarantee the potential borrowing requirements of Spain, Portugal and Italy over the next five years.
Euro Billion Loans Required over Next 5 Years
Renew New % GDP
Spain 60 821.0 56.00%
Portugal 25 103.4 47.00%
Italy 110 556.0 26.50%
UK 90 880.0 55.00%
The UK will not be rescued by this package and they will have to turn to the IMF when they run into problems in renewing and creating new loans to fund their deficit and debt. That is why there is such pressure from the financial markets to create a “stable” UK government that will quickly implement the cuts and tax rises need to reduce the deficit. But the party numbers and political differences in the UK do not add up to being able to provide such a “stable” government for any significant length of time. That is why the UK’s own Greek crisis is months or a year away at most with a fresh election almost certain to have to take place to try and provide such a “stable” government.
Whether governments have to turn to such funds or not they will have to make massive attacks on peoples living standards across Europe. We have to turn the resistance to these attacks into demands for a sane economy under common control. We should demand:
A cancellation of all government loans;
That the banks be taken under common ownership and control;
A massive wealth redistribution from the rich and wealthy to the majority of the population; and
A huge spending programme to create jobs, services and products that meet the needs of society and not the needs of profit