[D66] Stock market panic deepens euro crisis (2)

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Stock market panic deepens euro crisis
By Peter Schwarz
16 August 2011

The stock market panic of the past two weeks has clearly shown that none of the
problems have been solved that led the world financial system to the brink of
collapse in 2008. On the contrary, the global economic crisis has deepened over
the past three years.

An editorial in the Süddeutsche Zeitung at the weekend drew a parallel to the
Great Depression of 1931, which culminated in the Second World War. Two years
after the Wall Street crash of 1929, several economic experts declared with
optimism that the worst was over.

“What an illusion—and what disturbing parallels to today’s crisis, to the second
world economic crisis, as one must now call it,” says the Süddeutsche Zeitung.
Meanwhile, it was clear that as was the case “eight decades ago, several waves
of crisis will follow: triggered by collapsing banks, bankrupt states, poor
credit ratings or—at worst—the collapse of the euro zone.”

Three years ago, after the collapse of Lehman Brothers, politicians protested
they had drawn the lessons of 1931 and would not repeat the mistakes of stifling
the world economy through a deflationary policy. With the help of bank bailouts,
stimulus packages and low interest rates, they pumped billions from state
coffers into the banks that had triggered the crisis through their irresponsible
and criminal speculation.

Now the state budgets stand at the heart of the crisis. State debt has risen
sharply because of the support for the banks. For example, Irish government debt
has quadrupled, Spain’s has doubled, America’s has grown by one third and
Germany’s by one fifth. The banks have turned the tables. First they were
rescued using public funds, now they are demanding that budgets be slashed
through brutal cost-cutting measures.

Governments have bowed to the dictates of the financial markets and are
responding like their predecessors eighty years ago. They no longer talk about
the lessons of the Great Depression. Instead, they are destroying the
livelihoods of broad layers of the population, pushing the economy into
recession through new austerity measures.

The stock market panic of recent days must be seen in this context. The trigger
was the downgrading of the United States credit rating by Standard & Poor’s and
the deepening of the debt crisis in Europe.

Standard & Poor’s lowered its rating on US government bonds because the
financial markets considered that the social cuts agreed by the Obama
administration and the Congress were insufficient. In Europe, Spanish, Italian
and French government bonds came under the spotlight of the speculators because
the financial markets were not satisfied with the devastating austerity
programmes in the peripheral countries of Greece, Ireland and Portugal.

The run on the financial markets signalled that investors will not rest until
the last remaining social achievements of recent decades are destroyed—and not
just in the small countries in the periphery of the euro zone, but throughout
Europe.

The political elite understood the message and responded immediately. Last week,
the Italian government agreed on an additional cuts package of €45 billion,
although it had only recently slashed spending by €79 billion. The German
Chancellor and French President agreed to meet at a special summit today to give
a sign to reassure the financial markets.

The main topic dominating financial discussions is the introduction of common
European bonds—that is, debt issued jointly by all the euro zone countries.
So-called euro-bonds would allow countries such as Greece to finance their debt
at the same rate as Germany. Greece would face much lower interest rates than
before, while Germany would face higher interest rates on its debts.

This is why Germany has so far categorically refused to accept such euro-bonds.
Although the German economy, more than any other, has benefited from the euro,
Berlin rejects in any form a “transfer union,” a transfer of finances from
richer to the poorer countries of the euro zone.

But the pressure on Germany has grown considerably in recent days. In an urgent
appeal last weekend Italian Finance Minister Giulio Tremonti called for the
establishment of common bonds. Euro-group president Jean-Claude Juncker and EU
Monetary Affairs Commissioner Olli Rehn also called for euro-bonds.

In a contribution published in a number of German newspapers, the financial
investor George Soros spoke in favour of the introduction of euro bonds.
“Germany and other countries with ‘AAA’ bond ratings must agree to some form of
euro-bond regime. Otherwise, the euro will collapse,” he told finance daily
Handelsblatt.

The German government still officially rejects euro-bonds. And on Monday
Chancellor Merkel’s spokesman even explained that euro-bonds were not the
subject of the meeting with Sarkozy.

However, the Welt am Sonntag reported over the weekend, citing several
government members, that Berlin was now prepared to accept common European bonds
if this was the only way to save the euro. The previously chosen route, to help
countries with financial difficulties with multi-billion dollar bailouts is
reaching its limits.

However, Berlin does not want to openly announce such a move, but negotiate
“concessions from its euro-partners” in a longer process, was how Welt am
Sonntag described it. In essence, the highly indebted countries must give up
their economic and monetary sovereignty and submit to the dictates of the
financial markets unconditionally.

In this context, German Economics Minister Philipp Rösler suggested the
formation of a “stability union,” in which hard, tangible criteria would
automatically ensure the reliability of the single currency. First, all
countries should take up the German model of a constitutionally mandated
balanced budget and put their labour market to a stress test. A European
“stability council” should then decide on the use of credit and monitor
compliance with the loan conditions. It would act as an “executive committee” of
the EU in accordance with specified criteria that cannot be mitigated by
political influence.

Rösler justified his proposal, which had been agreed with Chancellor Merkel,
with the fact that the markets express a “basic mistrust” of the reliability of
political decisions. The markets assessed the economic situation of a country
more objectively than the political institutions.

In other words, the German government is demanding that the euro countries
subordinate their financial and economic policies to a European body that stands
outside any democratic control, and whose policies are largely determined by
Berlin. In return, they would then be willing to finance some of the debts of
weaker countries by means of euro-bonds.

The billionaire George Soros also supports this position. Euro-bonds would “then
be acceptable for German voters if they were based on clear financial rules that
must be set from Germany,” he told Der Spiegel.

What additional burden euro-bonds would mean for Germany’s budget is a matter of
dispute. A representative of the Ifo Institute spoke of a total of €47 billion
per year, which is likely to be an exaggeration. What is certain is that the
German government would shift the additional costs onto the working class and
pursue a harsh austerity plan similar to what Berlin has dictated for Greece,
Portugal and other highly indebted countries.

Several economists have calculated that a failure of the euro would prove far
too expensive for the export-dependent German economy.

Daniel Gros of the Centre for European Policy Studies (CEPS) expects a complete
collapse of the European financial and banking systems if the monetary union
should break up. The German economy would slump by 20 to 30 percent. In 2009, it
only dropped by five percent due to the financial crisis.

Gustav Horn from the Institute for Macroeconomic Research, and Michael Burda of
Berlin’s Humboldt University, anticipate that a re-introduced Deutschemark would
soon grow in value against the dollar and other European currencies by up to 50
percent. According to Horn, this would be a catastrophe for the export sector.
“It would wipe out medium-sized German businesses in one fell swoop.”

Nevertheless, the German government coalition is deeply divided over the issue
of euro-bonds. The Bavarian Christian Social Union (CSU), the Free Democratic
Party (FDP) and some Christian Democratic Union (CDU) parliamentarians oppose
European community bonds categorically. Many media comments now consider the
question a political powder keg that could cost Chancellor Merkel her majority.

Both the Greens and the Social Democratic Party (SPD) are ready to step into the
breach. Both have spoken out forcefully for the course that is currently
advocated in the majority of German business circles: the introduction of
euro-bonds, combined with strict European finance rules and other austerity
measures.

In a TV broadcast, SPD chair Sigmar Gabriel advocated the introduction of
euro-bonds. The prerequisite, however, was that countries seeking access to the
bonds submit themselves to strict European control and give up their budget
rights, he said.

Green Party chair Cem Ozdemir told the Rheinische Post that the appointment of a
European finance minister, control over the budgets of member states by the
European Union, and effective measures and incentives for fiscal discipline were
prerequisites for introducing euro-bonds. He specifically advocated even more
austerity measures. Those who want the euro must “be willing to pay a price for
it,” he said.

The establishment parties—whether conservative, social democratic or Green—know
only two answers to the economic crisis: the introduction of a European
financial dictatorship in defence of the euro, or the Balkanization of Europe in
the name of national interests. Both lead to disaster, deepening the social
crisis and exacerbating national tensions.

The worsening of the economic crisis is putting immense class struggles on the
agenda. In Tunisia, Egypt, Greece, Spain, Israel and many other countries,
workers and young people have begun to oppose the dictates of finance capital.
But these struggles can only succeed if they are guided by an international
socialist perspective.

Workers all over Europe must unite across the national borders and launch a
joint struggle against the dictates of the banks and their stooges in the
establishment political parties and the trade unions. Its goal must be the
establishment of the United Socialist States of Europe. This requires the
building of the International Committee of the Fourth International and its
sections in the whole of Europe.

http://wsws.org/articles/2011/aug2011/euro-a16.shtml