EU summit agrees to new rescue fund for the banks

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EU summit agrees to new rescue fund for the banks
18 December 2010

Following weeks of sharp conflicts, European government leaders agreed Thursday
in Brussels on initial steps for establishing a permanent financial crisis
mechanism. The European Stability Mechanism (ESM) will replace the existing euro
rescue scheme beginning in 2013.

Setting aside the fine words about “European solidarity” that always accompany
summit decisions, the new European crisis mechanism amounts to two things:

First, it guarantees that international speculators will continue to be
reimbursed with public funds when their investments collapse. Second, it ensures
that the cost of such rescue operations will be passed on to ordinary people
through draconian austerity measures.

The summit participants agreed to supplement the Lisbon Treaty with two
sentences overriding the existing prohibition against mutual financial
assistance. The German government had insisted on such an amendment because it
feared that Germany’s Supreme Court would otherwise ban the extension of the
current euro rescue fund beyond 2013.

The 16 member nations of the euro zone will now provide mutual financial support
after 2013 when a country falls prey to international speculators. However, this
will be coupled with extremely tough conditions.

The German government insisted that financial aid be given only where strict
conditions are met, and the crisis mechanism applies only if the euro zone as a
whole is threatened. For a country to receive protection against speculative
attacks, it must unconditionally submit to the austerity diktats of the
International Monetary Fund (IMF), the European Central Bank (ECB) and the EU
Commission, as Greece and Ireland have already done.

The original proposal, whereby private bond holders would automatically be asked
to share the financial pain should a state run into payment difficulties, was
buried at the Brussels summit. This will now happen only in individual cases.

The details of the new crisis mechanism, including its scope, remained undecided
on Thursday. A future summit will decide on these issues.

A joint proposal by Luxembourg Prime Minister Jean-Claude Juncker and Italian
Finance Minister Giulio Tremonti that a part of the national debt of all euro
zone countries be financed by issuing euro bonds was brusquely rebuffed first by
Germany and then by France.

Juncker and Tremonti had hoped that this proposal would provide better
protection against speculative attacks on the euro and result in lower interest
rates for highly indebted countries. But the German government was not prepared
for the sake of presenting a common front to accept a slight increase in the
interest on its own debt. This led to a heated public exchange between German
Chancellor Angela Merkel and Juncker in advance of the summit.

After the meeting, the German chancellor spoke of “a good day for the euro,”
saying the new crisis mechanism meant the summit had agreed “to ensure the
stability of the euro as a whole.”

In fact, the crisis of the euro continues unabated. Just a day before the
summit, the US rating agency Moody’s threatened to lower the credit rating of
Spain. This would have forced the country to pay the highest interest rate on
its debt in 13 years. A day later, Moody’s threatened Greece with a further
reduction in its credit rating.

Since December 2009, when several rating agencies downgraded Greece, triggering
the current euro crisis, the same pattern has repeatedly emerged. First, a
country’s rating is lowered. Next, the interest rate on any new debt is increased.

If the country falls into a debt spiral because the interest burden is growing
faster than public spending can be reduced, it is forced to turn to the European
rescue mechanism. This guarantees the banks full repayment of their investments,
while the government concerned is committed to implement harsher austerity measures.

This represents a great deal for the banks. They receive high interest rates on
bonds, while the risk is borne by the European rescue fund. If things go badly
they can cash out, their profits having been secured by the intervention of the EU.

Mohamed El-Erian, head of the investment company Pimco, admitted this candidly
in a recent Financial Times article. “Rather than being reassured by the
provision of liquidity to peripheral countries,” he wrote, “existing depositors
and creditors have used the rescue funds to exit their holdings.”

The Greek crisis established the pattern now followed by the banks in one
country after another. They provoke a crisis by pushing up interest rates on
government bonds, forcing the country to adopt a rescue package and a cuts
programme that decimates the living standards of the working class. Greece was
followed by Ireland. Next come Portugal, Spain and perhaps Italy.

The class character of these measures is becoming more and more apparent. While
Greece’s high public debt had a long and complex history, Ireland’s was a direct
consequence of the speculative orgy of the banks. The national debt was
relatively low until the government in Dublin decided to assume full
responsibility for the losses of the Irish banks. Now, public-sector jobs,
social spending, incomes and pensions are being gutted to pay off the debts of
the banks.

There is not a single European government—whether conservative, liberal or
social democratic—that is willing to oppose the dictates of the international
financial aristocracy. Like an insatiable Moloch, it constantly requires fresh
sacrifices, until the last remnants of the social gains of the working class
over six decades have been destroyed.

At the same time, the banks are aggravating national tensions in Europe. While
governments prostrate themselves before international financial capital, they
try to push the brunt of the crisis onto their neighbours. This threatens the
economic fragmentation and political balkanization of the continent. The
incitement of nationalism goes hand in hand with xenophobia and attacks on
democratic rights.

In Germany, there is talk of founding an Anti-Euro Party. To this end, economic
nationalists such as former employers’ federation president Hans-Olaf Henkel and
racists like Social Democratic Party (SPD) member Thilo Sarrazin are boosted by
the tabloids and talk shows.

They find support in the right wing of the Christian Democratic Union (CDU), the
Free Democratic Party and sections of the SPD. The uncompromising posture of CDU
leader Merkel on the European stage is in no small part due to fears that her
own party may break apart.

In Greece, right-wing and pseudo-left demagogues try to turn popular outrage
over the austerity measures of the Papandreou government into anti-German
nationalism.

A crucial role in the nationalist agitation is played by the trade unions, which
everywhere stand behind their respective governments, either openly or behind
the scenes. They support the austerity measures and sabotage any attempt to
develop a pan-European movement of the working class.

In 1924, Leon Trotsky wrote of the fragmentation of Europe:

“Bourgeois economists, pacifists, business sharpers, daydreamers and mere
bourgeois babblers are not averse nowadays to talk about a United States of
Europe. But that task is beyond the strength of the European bourgeoisie, which
is utterly corroded by contradictions. Europe can be unified only by the
victorious European proletariat. No matter where the revolution may first break
out, and no matter what the tempo of its development may be, the economic
unification of Europe is the first indispensable condition for its socialist
reconstruction.” (Leon Trotsky, “Europe and America”).

These words still apply today. Europe is at a crossroads. The alternatives are a
descent into depression, dictatorship and war, or the unity of the European
working class in the fight for workers’ governments and the socialist
transformation of society in the form of the United Socialist States of Europe.

Peter Schwarz

http://wsws.org/articles/2010/dec2010/pers-d18.shtml

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