[D66] Euro crisis deepens amid warnings of depression

[Antid Oto]

Euro crisis deepens amid warnings of depression
30 November 2011

Euro zone finance ministers meeting in Brussels have again failed to come up
with any solution to the deepening euro crisis amid warnings that the
increasingly likely break-up of the single currency will have catastrophic
consequences for the European and world economy.

Little more than a month ago, the euro zone finance ministers put forward a plan
to boost the capacity of the European Financial Stability Facility (EFSF), the
region’s bailout fund, to €1 trillion. Yesterday they were told by EFSF head
Klaus Regling that efforts to attract funds from China and sovereign wealth
funds in the Middle East had fallen through.

Speaking after the meeting, Regling tried to put the best face on a bad
situation, saying, “We do not expect investors to commit large amounts of money
in the next few days or weeks,” and adding that “leverage is a process over time.”

Having begun at the periphery, with Greece, Ireland and Portugal, the crisis has
now struck at the heart of the euro zone as last week’s failed bond issue by
Germany revealed. This has prompted warnings that, in the words of Financial
Times columnist Martin Wolf, “the world has reached a new and potentially even
more devastating stage of the financial crisis that emerged in the advanced
countries in the summer of 2007.”

On Monday, the Organization for Economic Cooperation and Development (OECD),
comprising 34 of the world’s leading economies, warned that even if an outright
disaster is averted, the European economy will stagnate. Pointing to “serious
downside risks,” it said that a “large negative event” would “most likely send
the OECD area as a whole into recession, with marked declines in the US and
Japan, and a prolonged and deep recession in the euro area.” The so-called
emerging markets would also be hit.

But something much worse would result from a break-up of the euro zone
precipitated by the withdrawal of one or more countries. “Such turbulence in
Europe,” it said, “with the massive wealth destruction, bankruptcies and a
collapse in confidence in European integration and cooperation would most likely
result in a deep depression in both the existing and remaining euro countries as
well as in the world economy.”

The OECD is not alone in such assessments. Forecasters at the Swiss banking firm
UBS have predicted that if the euro collapses, economies in the euro zone could
temporarily suffer a loss of output of as much as 50 percent. The rating agency
Moody’s has warned that an exit from the euro by any country could trigger a
cascade of sovereign debt defaults.

Like a forest fire, the crisis generates its own momentum as every piece of bad
news leads to shifts in financial markets which generate still more problems.
The head of the Brussels-based Bruegel think tank, Jean Pisani-Ferry, said “real
businesses” as well as financial markets were “pricing in a break-up scenario.”
Such is the fragility of the financial situation that these decisions themselves
could trigger a breakdown. “If disaster expectations build up,” he warned, “and
a growing number of players start positioning themselves to protect themselves
from it, the consequences could become overwhelming.”

And they would not just be financial. On Monday, Poland’s foreign minister,
Radaslow Sikorski, warned that the break-up of the euro zone “would be a crisis
of apocalyptic proportions.” He continued: “Once the logic of ‘each man for
himself’ takes hold, can we really trust everyone to act in a communitarian way
and resist the temptation to settle scores in other areas, such as trade?” If
trade conflicts develop, then the conditions will rapidly develop for military
clashes, he added.

In much of the media commentary, the euro zone crisis is ascribed to the refusal
of German Chancellor Angela Merkel and her government to allow the European
Central Bank to act as a lender of last resort or to establish euro bonds as a
way of guaranteeing the debts of each country.

But the crisis cannot be put down to the intransigence of the German government.
Its opposition to the proposed measures is based on the fear that if
implemented, they would, at best, provide only short-term relief, while in the
longer term they would drag Germany into the vortex.

Even a brief examination of the dynamics of the euro zone economy makes clear
that the roots of the crisis go much deeper than German intransigence. The debt
crisis is being fuelled by lack of economic growth across Europe.

For example, in Italy, where borrowing costs on government debt now regularly go
over 7 percent, touching even 8 percent on Monday, economic growth would need to
be 8.4 percent just to maintain the current sovereign debt to gross domestic
product ratio. In the past, governments could seek to boost GDP by devaluing the
currency and lifting exports. But under the euro regime that is no longer possible.

On the other hand, the imposition of austerity measures in a bid to lower
borrowing costs for Italian debt on financial markets pushes the economy deeper
into recession. Consequently, GDP falls, the debt to GDP ratio rises and
borrowing costs increase. A self-perpetuating cycle of austerity, lower growth,
increased budget deficits and rising interest rates is set off.

The existence of such vicious circles points to the fact that the debt and euro
crisis is not a conjunctural problem which can be overcome if only governments
implement the correct policies. Rather, it is the form taken by the breakdown in
the entire process of capitalist accumulation.

After the introduction of the euro in 1999, economic growth in Europe was
increasingly debt-dependent. Economic development took place unevenly, with some
countries, those on the so-called periphery, running balance of payments
deficits, while core countries, above all Germany, ran up surpluses. These
surpluses were then recycled by financial institutions to the periphery, where
the spending they generated formed the basis of core country export markets.

Under conditions of cheap credit, the introduction of the euro seemed to create
the conditions for an expanding European market, just as the recycling of export
surpluses from China into the American financial system made possible the cheap
credit that fuelled US economic growth after the recession of 2001.

But the collapse of Lehman Brothers in 2008 laid bare the rot and decay at the
heart of the international financial system and brought an end to the
debt-financed expansion of the European economy.

The European bourgeoisie has no solution to the crisis even as its own
institutions warn that it is hurtling to disaster. Only the working class can
advance a progressive solution through the political struggle to take power,
establish workers’ governments, expropriate the banks and financial institutions
and begin the rational planning of the European and international economy.

Nick Beams

http://wsws.org/articles/2011/nov2011/pers-n30.shtml