International Review no.142 - 3rd Quarter 2010

Capitalism has reached a dead-end; neither austerity packages nor recovery plans can change anything

"The G20 in search of a new way of governing the world". This was the ambitious title given to an article in Le Monde (26 June 2010) on the latest summit of the world's "great". An ambition in keeping with the catastrophic state of the planet!

An improvement in the situation is no doubt the subject of ardent hopes. But over the past two years, attacks on workers' living standards have been speeding up all over the world. Despite all the announcements about an economic recovery, the world economy is stagnating and its future looks increasingly sombre. In the face of all this, a meeting of the leaders in charge of running this world economy, the people who hold the fate of the planet's inhabitants in their hands, was obliged to discuss ways of making things better.

The meeting of the G8 which preceded this G20 had to agree on the policies to follow to take the world economy out of the crisis: carrying on with recovery plans as the US recommends and is doing, or imposing austerity plans to deal with the threat of bankruptcy looming over a growing number of states, as the most important countries of the European Union recommend and are doing. The G20 had to look at taxing the banks in order to build up a fund for resolving financial crises - the crisis of 2007 has not been resolved even if its most devastating effects have for the moment been held in check; at the same time, it had to agree on ways of regulating the financial system in order to avoid the most destabilising forms of speculation and to guide the financial resources liberated as a result towards developing production. What came out of this summit? Nothing. The mountain didn't even give rise to a mole hill. No decision was taken about any of the problems; as we will see in more detail later on, the participants could do no more than register their complete disagreement: "On the subjects which made up the bulk of this G20, the participants at the summit judged that the most urgent thing was to wait. The divergences were too great and so was the lack of preparation".[1] President Sarkozy of France did his best to play down this demonstration of powerlessness by the world bourgeoisie, commenting that "you can't take historic decisions at every summit"!

The previous G20s had promised to introduce reforms based on the lessons of the "subprime" affair and the financial crisis that followed. This time, there weren't even any promises. Why did the grand managers of world capitalism prove so incapable of taking the least decision? The root of the problem is that there is no solution to the crisis of capitalism other than the overthrow of this historically senile mode of production. There is also another, more circumstantial explanation: since the heads of state are aware that the world economy is sinking into a very deep hole, they are wise enough to avoid having to repeat the famous phrase of the former president of the Ivory Coast, F Houphouët Boigny: "We were at the edge of a precipice but we have taken a big step forward".[2] This time round, no one would be laughing.

The end of recovery plans and the return of the depression

The outbreak of the financial crisis in 2008 brought with it a fall in production in the major countries of the world (with a slow-down for China and India). To try to deal with this situation, the bourgeoisie in most countries was obliged to bring in recovery plans, the ones in China and the USA being by far the most significant. While these plans did permit a partial revival of global economic activity and a certain degree of stabilisation in the developed countries, their effects on demand, production and trade are now wearing off.

Despite all the propaganda about the so-called recovery, the bourgeoisie is now forced to admit that this is not how things have turned out. In the USA, growth was expected to reach 3.5% in 2010 but has been revised downwards to 2.7%; unemployment figures have grown week by week and the American economy has started destroying jobs;[3] in general, a number of indicators created to measure economic activity in the US show that growth is tending to weaken. In the euro zone, growth was a mere 0.1% in the first quarter of 2010 and the European Central Bank predicts that the total for the year will be no more than 1%. Bad news keeps on coming: growth in manufacturing is less and less strong and unemployment is again on the rise, with the exception of Germany. It is predicted that the GNP of Spain will continue to diminish in 2010 (-0.3%). It is significant that, both in the USA and Europe, investments keep falling, which means that enterprises are not envisaging any real growth in production.

Above all, Asia, the region of the world that was supposed to become the new centre of gravity of the world economy, is now seeing its activity slowing down. In China, the Conference Board index, which was predicted to rise by 1.7% in April, only went up by 0.3%; this figure is corroborated by all of those which have been published recently. While the monthly figures published about a given country are not necessarily indicative of a general tendency, the fact that, in the major countries of the region, economic activity has taken the same turn at the same moment does signify something serious; thus, the index of economic activity in India shows a slow-down and, in Japan, the figures for industrial production and household consumption for the month of May are falling.

Finally, confirming this trend, which gives the lie to all the media fanfares about the recovery, the "Baltic Dry Index", which measures the evolution of world trade, is also heading downwards.

The bankruptcy of states

While the evolution of different forms of economic activity testifies to a descent into depression, entire nation states are experiencing growing difficulty in repaying their debts. This can't fail to recall the sub-prime crisis which saw numerous American households unable to pay back the loans granted to them. A few months ago, it was the turn of the Greek state to be in the hot seat, and it was widely suspected that the state of its finances was much worse than had initially been announced. At the same time, the solvency of several other European states (gracefully given the acronym of PIIGS), Portugal, Ireland, Italy, Spain as well as Greece, was called into question by the debt-rating agencies. No doubt speculation on these economies worsened their difficulties, and the role played by these agencies (which were created by the big banks) is far from clear. It remains the case that what is basically at issue in the crisis of confidence affecting these countries is the scale of their budget deficits, which have reached levels unequalled since the Second World War, and of their public debt. The recovery plans put in place by the different states have made little impact on the situation. In fact they have led to a fall in the currency reserves of the different public treasuries, and consequently to increasing difficulties for the states concerned in repaying the interest on the loans extended to them. Now, the payment of the interest on their debts is the minimum condition for the great world banking organisms to continue loaning to them. But the PIIGS are not the only ones to see a very strong increase in their public deficits and thus in public debt. The debt-rating agencies have expressly insisted that Britain reduce its debt and warned that it will have to join the ranks of the PIIGS if it doesn't make a major effort to reduce its public deficit. We should add for good measure that Japan (which, in the 1990s was predicted to supplant the USA as the world's leading economy) has reached a public debt that corresponds to twice its GNP.[4] This list, which could easily be lengthened, leads us to the conclusion that the tendency of states to default on sovereign debt is a global one, because all states are being hit by the aggravation of the debt crisis since 2007, and all of them have suffered imbalances comparable to those of Greece and Portugal.

But it's not just states whose financial situation is nearing insolvency. The banking system is also in an increasingly grave situation, for the following reasons:

• all the specialists know and are saying that the banks have not been purified of the "toxic" products which resulted in the bankruptcy of numerous financial institutions at the end of 2008;
• the banks, faced with these difficulties, have still not stopped speculating on the world's financial markets by buying some very risky products. On the contrary, they have carried on playing the same game to try to make up for the massive losses they have incurred;
• the aggravation of the crisis since the end of 2007 has forced a number of companies to go bust, so that many households, hit by unemployment, can no longer, in contrast to previous years, repay the various loans they were given.

An illustration of this situation was provided recently, on 22 May, when a savings company in Spain called Caja Sur was placed under state control. But this event was just the tip of the iceberg as regards the difficulties facing banks in the last few months. Other banks in Europe have been downgraded by the debt-rating agencies (Caja Madrid in Spain, BNP in France); but above all, the European Central Bank has informed the financial world that the European banks will have to depreciate their shares by 195 billion euros in the next two years, and that their need for capital up until 2012 has risen to 800 billion euros. On another level, a recent event has been a striking verification of the present fragility of the banking system: the German company Siemens has decided to create its own bank, an institution which will be in its service and in the service of its clients. The reason for this is simple: having already lost the mere bagatelle of 140 billion euros at the time of the collapse of Lehman Brothers, the company is afraid of a repeat phenomenon with the liquidities it has passed through the tills of the "classical" banks. And we have also learned that Siemens has not invented anything new here, since the Veolia company, which is allied with British American Tobacco and other less important enterprises, did the same thing in January 2010.[5] It's clear that, if companies whose solidity is not in question for the time being are no longer putting their funds in the vaults of the big banks, the situation of the latter is not going to get any better!

But what is particularly important to underline is that problems connected to the insolvency of states and banks can only pile up more and more: this is already the case, but it's going to increase considerably in the weeks and months ahead. It's now clear that if a state goes bust and is not rescued by other states, as has been the case with Greece, this will result in the collapse of the banks which have given it massive loans. The credit doled out by German and French banks to the states belonging to the PIIGS group amounts to something like 1000 billion euros, so it is evident that if these countries default on their repayments this will have incalculable consequences on France and Germany, and thus for the world economy.

Today, it's Spain that is in the eye of the world financial storm. The European Central Bank has announced that Spanish banks that are not creditworthy enough to borrow on the money markets will be refinanced to the tune of 85.6 billion euros, just for the month of May. Moreover it is being said in the stock markets that the Spanish state has got to come up with a considerable sum by the end of July or the beginning of August.[6] Such sums have thus got to be found pretty soon and it's because the situation is so dramatic that the director of the IMF, D Strauss-Kahn, and the joint Secretary of State for the Treasury, C Collins, have both been to Madrid. A plan for salvaging Spain's sovereign debt, involving between 200 and 250 billion euros, is under review.

If there is such a strong focus on Spain at the moment, it's because the problems posed by the financial situation there could have very serious consequences:

• if Spain is not propped up and it goes bust, this would lead to a general discrediting of the euro and a loss of confidence in all payments in this currency; in other words, the euro zone as a whole will be in trouble;
• France and Germany, i.e. the strongest economies in the euro zone, would be unable to take up the slack if Spain defaults, and this would result in the destabilisation of their finances and, in the end, of their whole economy (see the analysis developed by the economist P Artus in Le Monde, 16 April 2010).

This means that any aid to the Spanish state to help it avoiding a default on its payments could only be the fruit of an agreement by all the western countries, and the price for this would be to make their own financial situation even more fragile than it is already. And given that, as we have seen, the majority of states are in a situation close to that of Spain, they would also have to come up with policies aimed at preventing them from becoming incapable of repaying a cascading sovereign debt. 

From all this it follows that capitalism no longer has the means to reverse the aggravation of the crisis that we have seen since 2007.

States differ on what policy to adopt

"Rigour or recovery: the persistent disagreement of the G8 leaders" was a headline in Le Monde's 27-28 June edition. Despite the diplomatic language used, it emerged clearly that the disagreement between the different countries was very deep. Rigour was called for by Britain and Germany, with the euro zone in its wake; recovery was wanted by the USA and to a lesser extent by China. What are the reasons behind this disagreement?

Recognising the grave implications for Europe and the world of the bankruptcy of the Greek state, the EU and the IMF finally organised the salvage of Greece's sovereign debt, despite the disagreements between the states taking part in the salvage operation. But this event resulted in a major hardening of attitudes among the countries of the euro zone:

• first, all finally agreed on the necessity to take steps to shore up states in dire need, since any defaulting on payments would shake the whole European financial system, risking its complete collapse. This is why a 750 billion support fund was set up, two thirds of it supplied by the countries of the euro zone and one third by the IMF, which has the job of making sure that states in default of payments are able to meet their obligations. Similarly, given the situation of the banks in the euro zone, the European Central Bank agreed to take on the more or less dubious debts owed by the banks. This is what we have just seen with the Spanish banks.
• Secondly, to reduce the risk of defaulting on payments, the states decided to sanitise their own public finances and their own banking systems. To do this they launched austerity plans which mean bringing down working class living standards to a degree comparable to what happened in the 1930s. The number of attacks is so great that just enumerating them would be beyond the scope of this article. Let's just take some significant examples. In Spain, civil servants' wages were cut by 5% and 13,000 jobs were eliminated. In Germany, 14,000 public sector jobs will be cut between now and 2014, and payments to the long term unemployed will be reduced. In all countries public spending will be decreased.

The logic claimed for these measures is this: while we must save the financial system through support to banks in difficulty and states that risk defaulting on their payments, it is necessary to make public finances more healthy in order to be able to borrow again later on and thus launch a new phase of growth. In fact, behind the declared objective, there is first of all the determination of the German bourgeoisie to preserve its economic interests; for this national capital, which has staked so much on being able to sell its commodities - especially its machine-tools and its chemical products - to the rest of the world, it is out of the question to bear the costs of a recovery or of helping other ailing European states by raising its own production costs. This would mean its commodities becoming less competitive. And since this is the only country capable of supporting other European countries, it is imposing a policy of austerity on all of them, even if that doesn't correspond to their interests.

The fact that Britain, which does not suffer from the constraints of the euro zone, is bringing in the same policy, is a significant expression of the depth of the crisis. For the UK, it's not time to boost a recovery since its budget deficit for 2010 has reached 11.5% of GNP. The risk of defaulting on sovereign debt is too great - it would result in the collapse of sterling. We should also note that Japan - given the size of its public debt - has adopted the same austerity policy. More and more countries are thinking that their deficits and public debt have become too dangerous, that defaulting on payment of sovereign debt would mean a considerable weakening of the national capital. They are thus opting for an austerity policy that can only lead to deflation.[7]

Now it's this deflationary dynamic which is so much feared by the US. They are accusing the Europeans of getting themselves into a "Hoover episode" (after the US President during the first part of the Depression in the 30s), which amounts to accusing the European states of pulling the world into a depression and a deflation as in 1929-32. According to the Americans, even if it is legitimate to want to reduce public deficits, this should be done later, when the "recovery" is really underway. By defending this position, the US is standing up for its own interests, since, as the holder of the world's reserve currency, creating extra currency to feed the recovery only costs them the price of the printing. However, this doesn't mean that they don't have a real fear of seeing the world economy lurching into a deflationary course. 

In the end, whatever options are taken up, the policy changes carried out recently as well as the fears expressed by the various factions of the world bourgeoisie reveal the disarray in their ranks: there are no longer any good solutions! 

What perspectives?

The effects of the recovery plans are over and a new plunge into depression is underway. This will mean that companies will have growing difficulties in making adequate profits and many of them will go under. The austerity packages which a large number of countries are putting in place can only accelerate the fall into depression and will engender a process of deflation, some signs of which are already appearing.

There can be no doubt that the hope that austerity policies will restore health to public finances and pave the way for future borrowing is a pure illusion. According to the IMF's calculations, the consequences of Greece's austerity plan will be a loss of 8% of its GNP. A fall in Spain's GNP is already predicted. Furthermore, austerity plans will lead to a fall in fiscal returns and this will serve to further widen the very deficits that the austerity plans are supposed to reduce! We can expect a fall in production in most countries of the world, and of world trade, by the end of 2010 and the beginning of 2011, with all the consequences this will have for the development of poverty and the degradation of working class living standards.

It's not impossible that, given the danger that austerity policies will only speed up the depression, a change of policy will come about after a few months, and the position advocated by the USA will be adopted. The last six months have shown us how incapable the bourgeoisie is of seeing beyond the very short term, since it has so little margin for manoeuvre: only one year ago everyone was in favour of recovery plans! If a new policy of revival is adopted, it will mean resorting to the printing press in a big way (some say that the US is already getting ready to do this). But then we will see a general fall in the value of currencies, i.e. an explosion of inflation, and that will also mean new and dramatic attacks on workers' living standards.

Vitaz 3.7.10

 

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[1]. Le Monde, 29 June 2010.

[2]. www.dicocitations.com/citations/citation-7496.php

[3]. After 5 consecutive months in which jobs were being created, 125,000 on were destroyed in June, which is more than the analysts feared. See the article "Après cinq mois de créations d'emplois, les États-Unis se remettent à en détruire" (www.lemonde.fr/economie/article/2010/07/03/apres-cinq-mois-de-creations-...)

[4]. Among other things, the fact that Japan currently holds the second largest currency reserves in the world allows it to be marked  less severely by the debt-rating agencies than many countries who are actually less deeply in debt

[5]. www.lemonde.fr/economie/article/2010/06/29/siemens-cree-sa-banque-afin-de-s-affranchir-des-etablissements-traditionnels_1380459_3234.html

[6]. We are talking about 280 billion euros. Of course, because of their origin (the stock markets) such figures are disputable and have obviously been denied by the authorities, since in such circumstances, silence would be taken as a confirmation and could lead to all kinds of panic.

[7]. This means a long term fall in prices, brought about in this case by a lack of demand, itself the consequence of austerity programmes.