Wednesday, October 31, 2012

Euro blockage

by Michael Roberts

Europe’s political elites were hoping that the euro debt crisis might subside after they agreed at the end of June to a plan to introduce a single banking system.  Immediately after, ECB president Mario Draghi announced that the bank would be willing to start buying the government bonds  of distressed Eurozone states like Portugal, Spain or Ireland in order to get the cost of borrowing down for them when private sector investors refused to buy them at reasonable prices.  This plan, called Outright Monetary Transactions (OMT), at first appeared to calm financial markets, and bond yields for the likes of Spain or Portugal fell, reducing the costs of servicing their debt.  However, the complacency is beginning to wear off.  Yields are on the rise again.

That’s because the politicians have announced these measures, but are very reluctant to implement them.  The Germans are worried that a single banking system would mean that its banks would be forced to take on the debts of the weak Eurozone states and have to share in any default losses, while at the same time be subject to scrutiny by a non-German entity, i.e. the ECB.    The German elite is finding it increasingly difficult to convince its parliament and the electorate that more funding for the weak states and more pan-European supervision is needed.  It’s less than a year away before the German elections and Mrs Merkel wants to avoid having to commit Germany to more funds for the likes of Greece, Portugal or Spain.  But it’s inevitable, unless Germany wants to call it a day.  So Merkel is hoping that she can push through a package of funding for Greece, Cyprus and Spain in one swallow.  In the meantime, she waits.

Spain too is in no hurry to ask for EU bailout funds.  It has already reluctantly taken money to bail out its stricken banks; but Spain’s conservative prime minister Rajoy does not want to ask for a full bailout of its government finances because it may mean the imposition of even more fiscal austerity measures that will only rile the electorate even more and increase the danger of regional break-up.  Already, the Basque country has voted for nationalist parties and Catalonian conservatives in a very rich part of Spain are talking of ‘independence’.  So Rajoy too is trying to delay things and hoping that financial markets will not target its government bonds in the meantime.

Q3 2102 figures for real GDP in Spain came out this week and there was a further fall of 0.3% on the quarter – that’s five contractions in a row.  And this is the rub for all these Eurozone economies.  There is no economic growth to deliver more income, employment and tax revenues.  The weak Eurozone states are in recession, while Greece remains in a long depression.
While Spain’s real GDP is contracting, inflation is accelerating due to increased VAT and other taxes on consumption and utilities.  This year real GDP will fall about 1.5% and there will be a further fall next year. The unemployment rate is likely to  hit 27% by 2014.  It’s no surprise then that social unrest and opposition to fiscal austerity is mounting.  It’s the same story in Portugal.  Portuguese constitutional judges declared the recent attempt to raise social security contributions as against the constitution, forcing the government to impose higher taxes instead.  Even these are under scrutiny by the judges (who have their own union!).

Only Ireland remains relatively quiet, even though the burden of bailing out its banks with public money and handling a collapse in property prices has been even greater than that for Spain.  The reason is clear.  The Irish are just turning out the lights in their busted homes and leaving the country to find work.  This highly educated and youthful workforce is emigrating in droves, just as they did in the decades before the Celtic Tiger appeared in the 1980s, driven by American corporate investment, extra low business taxes and a credit bubble generated by risk-taking banks, Icelandic style.  Emigration rates are back to levels not seen since the 1980s.

And then there is Greece.  The dreaded Troika of EU, ECB and IMF officials has been negotiating yet another package of fiscal measures with the conservative-led coalition that narrowly won last summer’s election.  The Troika want €13.5bn of austerity measures and, after tortuous negotiations, the coalition has come up with a package that it claims that the Troika will accept.  It includes cutting the public sector workforce by a net 5000 people a quarter through to 2015, reducing pensions for all yet again (already down 40%), a programme of privatisation of government assets to raise €19bn etc.  Most significant is another attack on the wages and employment of all Greeks that will end any job security and impose longer hours and poorer work conditions and benefits.  It is these latter measures that forced the junior partner in this infamous coalition, the Democratic Left, to say they would not support this part of the package.  The government intends to try and drive it through the Greek parliament anyway over the next week and thus convince the Euro leaders to agree to release funding by mid-November to keep the Greek government going.  The government will run out of money by the end of the month.

Meanwhile, the horrific damage to Greece’s public services is being exposed daily.  The New York Times produced a devastating report on the state of the health service.  “About half of Greece’s 1.2 million long-term unemployed lack health insurance, a number that is expected to rise sharply in a country with an unemployment rate of 25 percent and a moribund economy, said Savas Robolis, director of the Labor Institute of the General Confederation of Greek Workers.The health care system itself is increasingly dysfunctional, and may worsen if the government slashes an additional $2 billion in health spending, which it has proposed as part of a new austerity plan aimed to lock down more financing.

With the state coffers drained, supplies have gotten so low that some patients have been forced to bring their own supplies, like stents and syringes, for treatments.Hospitals and pharmacies now demand cash payment for drugs, which for cancer patients can amount to tens of thousands of dollars, money most of them do not have. With the system deteriorating, Dr. Syrigos and several colleagues have decided to take matters into their own hands.Earlier this year, they set up a surreptitious network to help uninsured cancer patients and other ill people, which operates off the official grid using only spare medicines donated by pharmacies, some pharmaceutical companies and even the families of cancer patients who died.

In Greece, doctors found to be helping an uninsured person using hospital medicines must cover the cost from their own pockets.At the Metropolitan Social Clinic, a makeshift medical center near an abandoned American Air Force base outside Athens, Dr. Giorgos Vichas pointed one recent afternoon to plastic bags crammed with donated medicines lining the dingy floors outside his office.“We’re a Robin Hood network,” said Dr. Vichas, a cardiologist who founded the underground movement in January. “But this operation has an expiration date,” he said. “People at some point will no longer be able to donate because of the crisis. That’s why we’re pressuring the state to take responsibility again.”

In a supply room, a blue filing cabinet was filled with cancer drugs. But they were not enough to take care of the rising number of cancer patients knocking on his door. Many of the medicines are forwarded to Dr. Syrigos, who set up an off-hours infirmary in the hospital three months ago to treat uninsured cancer patients Dr. Vichas and other doctors in the network send his way. Dr. Syrigos’s staff members consistently volunteer to work after their official shifts; the number of patients has risen to 35 from 5. “Sometimes I come home tired, exhausted, seeing double,” said Korina Liberopoulou, a pathologist on site one afternoon with five doctors and nurses. “But as long as there are materials to work with, this practice will go on.”

The Greek coalition is hoping that the EU leaders will agree to extend the period of bailout funding by an extra two years so that repayments will not have to start until then.  This is supposed to provide breathing space for Greek capitalism to get its house in order.  I have shown in previous posts that austerity is working in Greece in the sense that massive unemployment, reduced wages and benefits and pensions have cut Greek unit labour costs for Greek capitalists so that by 2015, Greece should be ‘competitive’ in European markets.  But that is still three years away and the hell is now.

Indeed, the reality is that there is no possibility of the Greeks meeting their fiscal targets, even with  an extension of bailout period.  As the IMF itself has pointed out, the target to reduce the government debt to GDP ratio from its current 170% of GDP to 120% by the end of this decade cannot be done.  The IMF reckons even with the new fiscal measures and on the most optimistic assumptions about growth, the debt ratio will still be around 135%, way higher than anything else in the Eurozone.  So Greece can never return to paying its way in financial markets, even beyond 2020.

Nothing is more obvious than that Greek public debt will have to be ‘restructured’ again.  Already, there has been one Greek default engineered by the EU and the IMF when Europe’ s banks agreed to a ‘haircut’ on their holdings in return for very long-term Greek government bonds guaranteed by the EU.  But that still left Greece with a huge debt burden and the economy in its fifth year of depression.   The IMF now suggests that Germany and other Eurozone governments should agree to take a haircut on the money that they have lent Greece over the past three years.  Only then could Greece get back on an even path.  This is anathema to the Germans, Finns and Dutch and so is ruled out for now.  But unless such a default is agreed down the road, Greece will fall behind its ‘targets’ again and then the issue of saving Greece (and protecting the euro) will be raised yet again.

I posed this issue in a previous post (No vacation for the euro, 24 July 2012) and I quote:
It remains to be seen which way the  Franco-German leadership want to go: to find more credit for Spain and Greece, or not.  If they cough up more cash in the next few months, it will mean extra costs for Germany and a very weak euro for years (although that will help exports).  But the alternative of a euro break-up is also very expensive. Defaults on loans made to Greece or Spain would hit German pockets directly through their banks and government finances.  And if Italy, Spain etc reverted to their own national currencies and devalued heavily, then their exporters could start to take market share from German suppliers and thus hit German GDP growth, much dependent on exports.  Of course, devaluation would mean that many corporations in Spain and Italy will default on their euro debts, causing wide scale business disruption and a huge jump in unemployment from already high levels.  On balance, it  would be marginally worse for Italian or Spanish capitalist sector to leave the euro than it would to stay in and suffer austerity.  Either way, it is hugely painful for the average household.

There is the socialist alternative that I have also outlined in previous posts (An alternative programme for Europe, 11 September 2011).  This is the adoption of a Europe-wide policy by governments through a fully publicly-owned European banking sector aimed at supplying credit for businesses and households.  Debts run up by governments to bail out these would be written off at the expense of bondholders (i.e mostly banks and hedge funds).   A pan-European plan for investment, employment and growth based on an expanded public sector would be drawn up.  Of course, this alternative is not possible while there are no governments in Europe willing to back it and instead are committed to preserving the rule of capital in the Eurozone.”

What I said then still stands.

No comments: