Will crisis break up the eurozone?

Submitted by martin on 1 December, 2010 - 11:40 Author: Martin Thomas

Questions and answers on the eurozone crisis.

Why isn't the EU/ IMF rescue plan for Ireland working?

The plan is not to rescue Ireland, but to rescue the banks (German, French, British, etc.) which lent money to Irish banks. Social cuts for the people of Ireland are supposed to allow the Irish government to use resources instead to make good its guarantee (given in 2008) to cover all the debts and deposits of those banks.

On condition of harsh cuts, the EU and the IMF provided the Irish government with long-ish-term loans to "increase confidence", and to cut short the process of Irish banks relying on spiralling amounts of short-term credit from the European Central Bank.

But the plan seems not to be working even for the banks.

"The markets" - that is, international financiers - think that, as the Financial Times puts it, "it is hard to see how Ireland can repay all the debt it has now taken on".

Sooner or later the Irish government will say that it just can't pay, and will negotiate deals to delay or reduce payments. Thus the market price of Irish government IOUs (bonds) continues to plummet, or (the same thing viewed from another angle) the interest-rate which financiers demand for those bonds rises.

The social cuts may be bad, but surely they'll free up enough resources for the Irish government to make its debt payments?

Irish government income is not a fixed amount. It depends on the total of production and income in Ireland.

Ireland is already in a slump, with unemployment high. The social cuts have the perverse effect of pushing unemployment higher, i.e. of reducing the amount of new value produced by Irish labour.

So the Irish government can make huge social cuts and despite that, indeed partly because of that, end up with less income to meet its debt payments. The Irish people get the cuts and the default that the cuts are supposed to avoid.

But the cuts can reorient the economy towards exports, which will bring new income?

Exports to where? This is the British government's idea, too - that social cuts will push along an economic reorientation to private-profit production for export.

But if all the big capitalist economies are cutting back social spending and domestic demand, who will import all those exports?

Why Ireland?

Over the last decade, since the introduction of the euro, states like Ireland, Greece, Portugal, Spain, and Italy, and banks within them, have been able to get credit more cheaply.

When they were borrowing in global financial markets in punts, drachma, escudos, and so on, then they had to offer interest rates which offset the risk, for internetional financiers, that at payback time the punts, drachma, or escudos would be worth less relative to major currencies.

In euros, they could borrow at more or less the same rates as the German government and German banks.

This easy credit helped fuel a speculative property boom in Ireland, and also in Spain.

Meanwhile, German capitalists used the discipline of the European Central Bank to help them keep labour costs in Germany down. German exporters more and more out-competed the capitalists of the poorer eurozone countries. Those countries ran big trade deficits, "balanced" by big inflows of credit.

Now the music has stopped. Credit has dried up.

Poorer non-eurozone countries have "adjusted" to the crisis by having their currency lose value in relation to the euro and the dollar. Eurozone countries can't "adjust" that way.

Ireland has a special problem in that its banks expanded their borrowing out of all proportion, in a way which banks in Greece, Portugal, etc. didn't do. But the structural problems with relations between richer and poorer countries in the eurozone are general. Which is why the Irish crisis is triggering trouble in "the markets" for Portugal, Spain, Italy (and Greece, too).

Why does so much depend on the guesses and fears of global financiers?

In the first place, because modern capitalism is saturated with debt-trading. Karl Marx wrote in Capital: "The wealth of those societies in which the capitalist mode of production prevails presents itself as an immense accumulation of commodities".

That is partly out of date. In modern capitalist societies, wealth mostly presents itself as an immense accumulation of financial paper, most of it "tickets" to future streams of interest or debt payments, in other words, "tickets" to future surplus value.

Vicious circles are a feature of this system. If leading financiers in the global markets think that Irish or Portuguese IOUs are duds, then their price falls, and even minority-view financiers who are more optimistic about Irish or Portuguese "economic fundamentals" will sell Irish or Portuguese IOUs until they are fairly sure that the price has stopped falling.

The Irish or Portuguese governments and banks then find it harder, and have to pay more, to get new credit. They get deeper into trouble. Their IOUs become duds even if they weren't before.

Then the answer is to curb the financial markets?

Capitalism with production and distribution chains spread across the world needs fast-flowing and "deep" global financial markets - unless it can organise itself to have a single world money (and we see now the difficulties of having international money even for a relatively compact unit like the eurozone).

Capitalist corporations borrowing funds in one currency, paying suppliers' bills in several others, and getting revenue in yet others, will suffer catastrophic losses unless they can trade and "hedge" between currencies slickly. On the basis of that need a huge financial superstructure arises. It is organic to modern capitalism, not an easily-curbed add-on.

The answer is: to fight capitalism, to fight for workers' governments which control finance in their countries and link up internationally to control the global production chains.

What will happen now?

The Financial Times says flatly: "An Irish default [announcement that it can't meet debt payments] is surely now only a question of when, not if".

It could be some months, or even a couple of years - the EU and IMF loans mean that the Irish government doesn't have to borrow much for a while - or market panic could bring the default earlier. We don't know.

Martin Wolf, in the Financial Times, continues: "The question now is not whether the eurozone can avoid a wave of fiscal-cum-financial crises. The question is whether the [eurozone] will survive".

Quitting the euro would hurt Ireland, or Greece, or Portugal, or Spain. The restored punt, drachma, escudo, or peso would initially lose value fast against the euro, and debts would still have to be repaid in euros. But that would also enable those countries to cut their costs (as measured in euros) and win more export income. A point may come when they see no other option.

That could lead to a shrinking of the eurozone, to a smaller number of stronger economies, or to its complete collapse and a return to national currencies. I don't know which is more likely.

A collapse of the eurozone would not mean the break-up of the European Union, but it would severely damage it and slow down its efforts to integrate capitalism on a continental scale.

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