[D66] Fierce tensions in run-up to euro-zone emergency summit

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Fierce tensions in run-up to euro-zone emergency summit
By Peter Schwarz
21 July 2011

The euro zone emergency summit taking place today in Brussels is seen by many
observers as critical for the future of the euro and the European Union. If the
assembled heads of state and government do not agree on crucial steps to
overcome the European debt crisis, according to many commentators, then what is
threatened is another wave of speculation against the common currency, the
failure of the euro, and the breakup of the European Union (EU).

“The euro zone’s strategy for dealing with its members’ fiscal problems is in
tatters, and it is far from certain that its leaders will be willing and able to
come up with a more successful alternative when they meet Thursday,” writes the
Wall Street Journal. “If they do not, the currency area will not survive.”

The Financial Times comments: “Now it is obvious that the battle for the euro is
entering an altogether more dangerous phase. Europe faces...not a mere liquidity
problem in a small, sun-kissed Mediterranean state, but a systemic crisis of its
monetary union.”

“The Euro”, the British financial newspaper continues, “stands as the crowning
achievement of the post-1945 project of European political and economic
integration. Remove this pillar and there is no saying what may happen to the
rest of the architecture, as well as to the EU’s influence in the world.”

The economics professor and EU advisor Stefan Collignon even compares the
situation with the eve of World War I. “Europe is now in a situation like 1913,”
he said in an interview with Die Welt. “No one wanted the First World War, but
everyone slid into it out of incompetence and lack of foresight.”

The summit has been preceded by two dramatic weeks. While the governments in
Greece, Ireland, Portugal and other highly indebted euro zone members have
pushed through brutal austerity programmes, the financial markets and rating
agencies have stepped up the pressure and extended this to core EU countries
such as Italy, Spain, and to some extent France.

The yield on two-year Greek government bonds has climbed to 42 percent. In other
words, the country has to pay 42 percent interest if it borrows money on the
open market rather than from the EU and the International Monetary Fund (IMF).
Despite the austerity measures, Greece’s total debt continues to rise unabated.
The cause is the recession triggered by the austerity programmes and the
relatively high interest rates it must pay for funds from the European rescue
package.

Greek public debt will reach 175 percent of gross domestic product in 2013. The
country will have to spend 27 percent of its tax revenues just to service the
interest on the debt. Under these circumstances, escaping from the debt trap is
impossible; bankruptcy can only be avoided through a debt write-off or
restructuring. However, European governments are deeply divided over how such an
event should take place.

Ireland, too, must now pay higher interest rates than before on the open market,
although the country is considered a model pupil of the IMF and achieved strong
economic growth in the first quarter of 2011.

Earlier this week, interest for Italian and Spanish government bonds rose
sharply, although the Italian parliament passed an austerity package last week
worth some €79 billion. Interest rates lie over 6 percent for both countries;
6.5 percent is estimated to be the limit above which it is impossible to keep
the debt under control.

With the increase in interest rates, the financial markets are pressuring
European governments to put together a new multibillion-euro financial package.
While this is officially dispensed as a “bailout measure” for the indebted
countries, in reality the funds would flow directly into the accounts of the
banks and financial investors.

The case of Greece shows this very clearly. The country has not been saved
through international “aid”, but ruined. Unemployment, homelessness and hunger
have increased dramatically. A study by Professor Savas Robolis of the
University of Panteion in Athens concludes that the workers’ and pensioners’
living standards will fall by 40 percent by 2015, compared to 2008.

Of the now 800,000 unemployed, only 280,000 are entitled to modest state
assistance; the rest face destitution. In the capital, homelessness has risen by
a quarter. In the centre of Athens alone, 4,000 people are fed each day from
soup kitchens run by the Orthodox Church. In the rest of the country, there are
hundreds more such kitchens.

Small businesses with no more than four employees, which include 930,000 out of
960,000 Greek companies, are not doing much better. Last year, about 60,000 of
them closed. This year, it will be a similar number again.

The international bailout funds are not being used to help the Greek people, but
to refinance the debt. Banks and major investors receive full payment on a debt
for which they have already collected high risk premiums, while a large part of
the risks surrounding the new debt are being shouldered by the public purse of
the euro zone countries. The European Central Bank has also spent vast sums
purchasing Greek government bonds, freeing the private banks from risk.

In principle, all the European governments agree that they must comply with the
demands of the banks and put together new billion-euro rescue packages to fund
deficits largely created by bank bailouts after the 2008 financial crash. But
the question of who bears the costs has led to deep tensions and conflicts that
now threaten to blow the EU apart.

Above all, the German government—and with it some of the wealthier countries
like the Netherlands, Austria and Finland—has made participation by private
creditors a condition for further bailout packages for Greece. This is not
directed against the banks, but at reducing their own share of the costs. As the
economically strongest country, Germany will have to shoulder about a quarter of
the cost of public rescue packages in the euro zone. German banks—which in the
event of a Greek bankruptcy would be bailed out by the government—hold a much
smaller proportion of Greek debt compared to their counterparts in other
countries, such as France.

Germany and her allies also oppose other measures that would make them shoulder
a higher proportion of the costs. For example, they reject the issuing of “euro
bonds”, a common European bond that would provide Greece access to funds at low
interest rates, but which would slightly raise their own interest rates.

However, such euro bonds are favoured by France and Italy, which fear being
dragged into the vortex of speculation. While the interest rates on Italian
bonds have already risen sharply, in France, the price for credit default swaps
(CDS) has shot up.

Ahead of the summit, hectic discussions about various models and scenarios to
resolve the crisis are taking place behind the scenes, which will then be
decided at the summit itself, if at all.

Especially in Germany, the euro crisis has unleashed fierce internal political
tensions. Within the government parties, there is a vocal minority that rejects
providing any financial support to Greece. In Finland, Austria and the
Netherlands, strong right-wing populist parties are openly opposed to the EU.

Chancellor Angela Merkel is accused of adapting too readily to these forces and
speaking out too little for the preservation of the euro and the EU. Business
circles point out that German export industries have greatly benefited from the
euro, and that the failure of the single currency would prove far more expensive
than taking a higher stake in the new bailout fund. Former chancellors Helmut
Schmidt (Social Democratic Party, SPD) and Helmut Kohl (Christian Democratic
Union, CDU) have accused Angela Merkel of showing a lack of European commitment.

Last week, three leading Social Democrats—party chair Sigmar Gabriel,
parliamentary leader Frank-Walter Steinmeier and former Finance Minister Peer
Steinbrück—issued a joint letter to Merkel, offering her a kind of informal
coalition. They called for a “Marshall Plan for Europe’s peripheral countries,”
a cut in debt for Greece and the issuing of euro bonds, promising the chancellor
the support of the SPD if she acted more forcefully to advocate the preservation
of the euro.

What the SPD leadership presents as a “solution to the financial crisis” has
nothing to do with taking a stand against the dictates of the banks. On the
contrary, Gabriel, Steinmeier and Steinbrück believe that Germany must impose
its imprimatur on Europe far more strongly, ensuring harsher attacks on the
working class not only in Greece but throughout Europe.

In the SPD-Green Party coalition under Gerhard Schröder, and then in the grand
coalition under Angela Merkel, in which all three were ministers, the SPD was
central to the creation of a massive low-wage sector. They imposed welfare and
labour “reforms” and raised the retirement age to 67. Now, they are proposing to
impose these policies across all Europe.

SPD leader Gabriel specifically offered to support Merkel even when she imposes
unpopular measures. “It costs the state money, and that costs the citizen money,
for which they get nothing. But the SPD must nevertheless support this,” he said.

The Italian Democrats (successor to the Italian Communist Party) have undertaken
a similar initiative. Last week, they approved the new austerity programme of
the Berlusconi government; they are now looking for ways to replace Prime
Minister Silvio Berlusconi, who in business circles is regarded as too weak and
too concentrated on his own interests to impose the brutal social cuts. Former
Prime Minister Massimo D’Alema (a Democrat) has proposed a government of
national unity, to be led by the non-partisan economist and former EU
commissioner, Mario Monti.

http://wsws.org/articles/2011/jul2011/eusu-j21.shtml