Guest blogger: Left Banker: Will The Euro Fall Apart?

Raphie de Santos
 
As it currently exists the Euro as the single European currency is highly unstable. Ultimately it can only succeed if backed by a single European state power and the unification of existing national currency reserves. The latter is not the case but the former is only partially true. A single European state can only be created through a real consolidation of European capital. This is clearly not the case in any of the major European industries such as car production, engineering, and banking. The European capitalists have not surrendered the idea of “national sovereignty” of any of their major industries. So for instance there are German, French and Italian car industries. National states are then used to defend the interests of their own national industries, even though they may be multinational or transnational companies their profits are returned to the capitalists of one national state.
 The purpose of the European Union was and remains to create pan European monopolies to compete with the US and Japan. This has clearly not happened and we have in Europe a diverse set of economies based on the national capital but with a single European currency based on the idea of the complete integration and consolidation of all the economies.
 The European currency is therefore based on this contradiction and should be inherently unstable. These were the fears when the currency was launched but at the time they proved to be unfounded. The low interest rates set by the European Central Bank at the onset of the currency allowed the countries in the Euro to enjoy a boom based on easy credit and a housing bubble. This papered over the contradictions between the national capitals and the wide range of national economies including Germany, Ireland, Spain, and Greece. The latter three countries benefitted from much lower interest rates than the individually weak economies could sustain on their own.
 However, the onset of the credit crunch in 2007 leading to the deepest recession since the 1930s saw these contradictions come sharply to the surface. We are very probably in for a long period of stagnating and slowly declining economies, a second depression of modern capitalism. If so these contradictions will remain with the very probable consequence being the destruction of the Euro in its present form and the return of national currencies throughout Europe. 

What are the current contradictions that are likely to pull the Euro apart?

The Pull of the Weak Economies

The weaker economies of Spain, Greece, Portugal and Ireland are pulling the Euro in one direction. They initially benefitted from lower interest rates when they joined the Euro. This was an effective devaluation for their economies and allowed them to participate in a boom. In Spain and Ireland in particular this was a property boom. But the credit crunch and the following quasi depression has seen this boom lead to bust and large deficits appear. In the case of Greece the real deficit was concealed by the use of complex derivatives that moved it off Greece’s visible balance sheet.
 The Euro is a neoliberal project and restraining deficits to 3% a year for each member country should increase the rate of profit through higher levels of exploitation. The reduction of the ballooning deficits across Europe and in particular in the weaker economies is designed to put this process back on track under the guise of “prudent fiscal management”. 
 But the fight of the European Central Bank (ECB) against inflation and its desire to impose austerity means that these weak economies have a stronger currency that partially reflects the German and French economies. There are social, cultural and political reasons why they will not be able to impose fully the austerity measures that the ECB wants. If they had their own currencies they could have let them devalue and increase the competitiveness of their economies that way. Their inability to implement the austerity measures demanded of them will put pressure on them to leave the Euro so that this currency devaluation can take place. The pressure to do this will increase if as likely the Euro strengthens against the US dollar on the back of a slowing US economy.
 
The Pull of the Strong Economies

On the other side of the tug of war over the Euro are the stronger Euro economies of Germany, France, and The Netherlands. Their economies are subsidising the debts of the weaker European economies. This is putting further strain on their own fiscal situations and leading to additional austerity for the stronger economies. There will not only be pressure on these economies from bearing the debt and deficits of the weaker Euro countries but from the electoral disquiet at paying the debts of all the Eurozone countries.
 The debts are likely to be much larger than the ECB and the financial markets are estimating. This will happen on two fronts. Firstly the inability of weaker governments to deal with the huge levels of public debt and secondly the inability of the banking system to deal with further financial stress. 
 Take for example Greece, even if it was able to meet all the three year austerity requirements of the ECB and the International Monetary Fund (IMF) it would be still left with a debt at the end of three years of about 150% of GDP. Of course this austerity programme will create a deep recession – estimates for the shrinkage in GDP this year are around 4%. This will mean that Greece will not have the tax revenues to pay any of this debt or refinance the debt on the international financial markets. Debts of this level can only be sustained by subsidies from the stronger northern Euro economies. While the bailout plan will probably see the weak countries through 2010 the next major hurdle will be the refinancing of the weak Euro countries’ debt in mid 2011. At some point in the next few years Greece and the other weak Euro economies will have to reschedule their debt. This will effectively write down the value of their existing debt by around 40% creating huge losses for banks across Europe. The current stress tests on European banks are refusing to acknowledge the scale of these losses and they are being estimated at a much lower level.
 Only seven European banks failed the tests which were supposed to estimate how much money European banks could lose if a similar scenario to the financial and economic crisis caused by Lehman’s bankruptcy was repeated. The test came up with a total capital requirement of 3.5 billion Euros! This shows how divorced from reality these tests were given that the European governments including the British had to fork out hundreds of billions of Euros and Pounds to shore up their banks.
As well as underestimating the losses that European banks would incur from the rescheduling of debt by weak Euro countries there were a number of other short-comings with the tests. The first was that those tests only looked at the front trading books rather than the back loan books where most of the losses were made in 2008-9, mainly on declining commercial and private property prices. Finally, the tests included the banks’ current tier one capital hybrid securities which are government guarantees. Tier one capital is supposed to represent liquid capital which can be quickly turned into cash to cover immediate losses. The tests then overestimated the amount of liquid capital that the banks have at their disposal to cover losses from any new stress to the financial system. 

In conclusion, if as we believe that Europe will enter a double dip recession followed by stagnant growth – in effect a quasi depression – then the dual pulls on the Euro will increase. It is unlikely that in this situation that Euro can survive in its current form. The contradiction of a single currency covering competing national capitalisms which have varying degrees of developments will finally be no longer sustainable. 

750 Billion Euros to Bail out Europe: But Europe’s Crisis is far from Over

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

HOW TO MAKE GREED HISTORY!

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Whatever the result, due to be declared in Edinburgh on Monday 8th, the SSP would like to thank all of our members and supporters who have made the Make Greed History campaign a huge success, particularly those socialists in USA, Switzerland, England, Wales and the North of Ireland who have contributed to the fantastic response to our financial appeal (we are not a party of or for millionaires - so donations from ordinary people keep us able to fight FOR ordinary people - to donate, please text a pledge to 07810205747).

Click Candidates pictures below for a short video.







Mark Callaghan is the local candidate in the Bishopbriggs South by-election. Let the greedy "main parties" know what you think of them by voting for CHANGE!


Mark on Woodhill Road, Bishopbriggs South on Wednesday during a whole day of campaigning.

Mark's Press Release as featured in the Kirkintilloch and Bishopbriggs Herald:

I'm a 43 year old activist, who will challenge the greed agendas of the main parties.

Privatisation con-tricks -PPP/PFI -have been used to build several local schools. Bishopbriggs now has fewer schools and the school buildings are owned by private firms.

This means EDC is hugely mortgaged. For the next 30 years WE will pay millions to giant companies. I am committed to ending this rip-off. I want big business out of schools and hospitals.

This would free up millions to invest in health, housing and education.

I support a wealth tax that will create 80,000 jobs in Scotland with an average wage of £25,000; insulate Scotland’s homes; ensure no schools close; upgrade existing schools; reduce class sizes to 20 and less and pay for free school meals.

The Labour Party and it's Councillors are closing schools - tearing the heart out of communities and cramming children into huge "superschools". The SNP seem powerless to stop this -or don't want to. I will fight this wrecking of our education system.

I will fight the privatisation of Royal Mail. It’s profits (2008-£323m) should be for hospitals and schools and not for shareholders in private companies like TNT.

Be part of the party that represents YOU!

Big Parties like the Labour Party, Tories and Lib Dems are funded by big business and millionaires, so they in turn serve the rich.

Our campaign to get Mark elected in Bishopbriggs South - and our Euro Election campaign, as in all of our campaigns, are funded by ordinary people - you and me, so the Scottish Socialist Party is a true party of the people.

Any elected representatives of the SSP, as when we had six MSP's, vow to take only the average workers wage - around £24,000 a year - not the £64,000 + £000's of expenses the main party representatives have chosen to take from our taxes.

If you would like to have a representative who is truly answerable to you - AND NOT BIG BUSINESS OR MILLIONAIRES - vote SSP next Thursday.

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Scottish Socialist Party Euro-elections broadcast