London Protests and European Meltdown

On 30 November, like thousands of others, I was out marching under a trade union banner in London because I believe that ordinary workers, whether in the public or private sector, should not have to pay for the costs of the financial and economic crisis. No matter how the Tories spin it, real disposable household income has fallen by an estimated 4.9% since 2008 and in the period 2009-14 will fall by 7.4%.[1] If you look at the distribution of the pain as estimated by the Institute of Fiscal Studies, it is the low and middle deciles which are being hit hardest. The Chancellor has told us that the pain will continue until 2017 at least. Osborne has remained totally silent about the shocking fact that those at the very top of the income pyramid will continue to do just fine.

Perhaps the most disturbing thing about what is starting to be called the ‘lost decade’ is that the Tories have got away with the twin lies that: (a) it’s all Labour’s fault for maxing out our national credit card; and (b) that public sector workers are a privileged elite. Both arguments are ludicrous… although many ordinary people continue to believe them. Nothing helps fuel anti-protester feeling more than seeing a single mum on television lamenting the fact that, unlike public sector workers, she’ll have no pension. Sadly, two-thirds of private sector workers have little if any pension and less than 20% of them still enjoy a pension linked to final earning (so-called ‘defined benefits’). As for single mums, only 18% will receive the full state pension of about £5000. Who benefits from this race to the bottom — the answer is those who want to shrink the state.

What links this to the looming crisis in the Eurozone and more widely in the EU? Well, what’s happening there (and here) is another slow-motion banking crash. But this time, instead of being fuelled by the US underclass reneging on unaffordable mortgages they were duped into buying, the crisis this time is being driven by Merkel and her German banker friends arguing that it’s all the fault of the profligate southern countries like Greece, Portugal and now Italy. Just like Osborne, Merkel’s proposed cure is austerity for the masses.

Recall that the 2007/08 credit crunch would have turned into a financial catastrophe had not the US and UK governments insisted on a huge injection of liquidity into the banking system. By ‘financial catastrophe’ I mean a huge bank run, people queuing up to withdraw savings and empty ATMs throughout the OECD. It’s now happening again in slow motion — European bank lending is drying up, or else to get money from the markets they must produce more collateral. Not only are the banks failing to run up at the bond auctions (ie, Germany last week failed to sell nearly a third of its Bunds), but they are now threatening to dump their existing holdings. Greece and Portugal have effectively been locked out of private markets and are told by the larger Euro Area countries that they might have to give up the Euro.

Italy is too big to be kicked out, but between now and the end of 2012 it will need to roll over about €500bn in debt. Spain will need to sell bonds worth a further €150bn in 2012.[2] The IMF says that Europe’s banks need at least €100bn in additional capital. Bear in mind that the European Financial Stability Facility (EFSF) has about €250bn left which with luck might be leveraged up to €5-600bn and you can see the magnitude of problem. Almost every commentator agrees that the only institution with sufficient firepower to calm the markets permanently is the ECB. As one piece puts it: “The recognition of the ECB’s firepower is the flipside of an acknowledgement that efforts to leverage the eurozone’s [nominal] €440bn rescue fund have fallen short of the €1,000bn goal set by European leaders in October.” [3]

Note that neither Italy nor Germany can be accused of maxing out their credit card. Germany may have a high debt-GDP ratio, but it is running a huge current account surplus. Italy’s debt-GDP ratio has been relatively stable for the past decade. The problem Italy faces is near-zero growth and rising interest on its debt. These two factors have locked Italy into a situation where in order to regain the confidence of the markets, government must run a hefty budget surplus in order to service its debt. Although this could be done in principle by more efficient tax collection — which the Prodi government tried in 2006 only to be defeated by Berlusconi’s right-wing coalition — what the Germans will probably demand is immediate deep budgetary cuts.

With private sector institutions and households trying to rebuild savings, budgetary cuts tend to reduce national income, thus forcing the debt-GDP ratio to rise and further undermining market confidence. Just as in the case of the UK, fiscal austerity is like a self-fulfilling prophecy —- it tends to produce the need for more fiscal austerity. The Merkel vision of ‘economic governance’ is quite different from that shared by those who want to protect and strengthen a more ‘social’ Europe. It is about saving the banks at the expense of labour. In the words of Andrew Watt of the European TUC Institute (ETUI), “If the price of debt mutualisation and ECB support is one-sided debt brakes, generalised austerity and attacks on collective bargaining institutions and welfare states, it will not be a price worth paying.” [4]
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1 See http://www.bbc.co.uk/news/business-15969165; also http://www.guardian.co.uk/politics/reality-check-with-polly-curtis/2011/dec/01/economics-financial-crisis
2 See http://www.ft.com/cms/s/3/7cb5d724-1b51-11e1-8b11-00144feabdc0.html#axzz1fIr3hHY6
3 See http://www.ft.com/cms/s/0/123833b4-1b7a-11e1-8647-00144feabdc0.html#axzz1fIr3hHY6
4 See http://www.social-europe.eu/2011/12/is-there-finally-light-at-the-end-of-the-tunnel/

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