The markets breathed a sigh of relief after the announcement of a huge bail-out fund for the crisis ridden Eurozone but will it be enough?
The European Central Bank (ECB), together with the International Monetary Fund, have created a ‚Ç¨720bn bail-out fund for stricken Euro economies. Eurozone members have promised to contribute ‚Ç¨440bn. ‚Ç¨60bn will come from all EU members. And the IMF will provide the remaining ‚Ç¨220bn.
The astronomical sum will be used to provide loan guarantees and quick credit to countries suffering from speculative attack.
In addition, the ECB will adopt a form of “quantitative easing”. European banks hold many loans that they fear will default. The ECB will aim to take some of those bad loans from the banks, and replace them with more reliable euros.
Once again, the banks are being offered an almighty handout.
But most of the ‚Ç¨720bn is not available immediately. It’s just an offer of funds, designed to prop up collapsing economies if needed.
The theory is that if this promise looks as though it would successfully support economies in a debt crisis, speculators will be deterred from attacking individual nations. The euro as whole would then be stronger, and therefore debt crises will not occur.
For a while at least, it appears to have worked. Stock markets rallied after the announcement.
But this should not be too surprising.
If you promise someone nearly ‚Ç¨800bn, they’ll cheer up a bit, regardless of how dire their actual situation might be. This was precisely the reaction of the financial markets yesterday.
In response to yet another bailout, banking shares were fastest to rise, RBS gaining 15% in price on the day. Once again, our political leaders have demonstrated their willingness to put financial interests above all else. That willingness has, for the time being, calmed markets a little.
But the ECB plan has done nothing to address the underlying problems. And they are creating a whole series of new headaches.
Not all the EU countries are signed up to key details. The German Bundesbank is deeply unhappy about creating new money to buy worthless loans from banks. It fears this will damage the credibility of the euro.
It is entirely unclear that the purported bail-out mechanism will work. Countries have pledged funds if needed, but they may not do so if actually called upon. Fiscal conservatives elsewhere in Europe will have noted the slump in Angela Merkel’s CDU party vote in the weekend’s regional elections.
And debt-stricken Euro countries may not be able to afford another country bail-out, even if they want to. Bailing out a second or third economy would be virtually out of the question.
This points to the fatal flaw in the whole scheme. There is no mechanism across the EU to move funds in this way from country to country. Although the EU supposedly sets rules on taxation and spending for Euro members, these have been widely ignored. Fiscal policy - taxes and spending - varies widely.
Introduction of the Euro forced all member states into the same monetary policy. Interest rates across the Eurozone were fixed by the ECB, and exchange rates fixed permanently.
But it did not fix fiscal policy. The EU lacks the central authority able to do this. This means it cannot enforce transfers of cash across its own member states.
So there is a contradiction between the fiscal and monetary policy that has not been resolved. Countries are fixed to one kind of monetary policy, but not fixed to a fiscal policy. To please the financial markets, the two should be aligned.
Only if the EU builds a strong central authority will it be able to solve this misalignment. It would have to start behaving more like a single state.
The fantasy of a progressive euro
One theory, touted by left-wing supporters of the Euro, is that it could develop this central authority in a progressive direction. A radical European finance ministry could then force transfers from the rich regions and people to the poor.
This flies in the face of all previous experience. The Euro has been a neoliberal project from the off, deliberately establishing institutions like the European Central Bank that privileged the wishes of financial markets above the wishes of EU citizens.
This was done to ensure a strong euro. If the financial markets believe that a currency will be backed up by firm controls on taxation and spending, they will believe a currency is a reliable store of wealth and make sure they hold it in reserve.
The euro project was devised with the intention of making the euro a worldwide reserve currency, alongside the dollar. Neoliberalism across the continent was the result.
This will continue if any movements are made towards creating a central fiscal authority. The EU would rather grind poorer countries down than lift them up. The so-called “rescue package” offered to Greece made this clear. Happy markets are more important than people’s livelihoods.
Of course, movements towards a centralised European fiscal authority would meet with huge resistance, on the streets and in the national corridors of power. It’s not a viable project at present.
But that doesn’t stop the EU doing what it can to try and push member states into line.
A downwards spiral
So alongside the ECB bail-out are some dark threats to enforce stronger “fiscal discipline” on the Euro’s poorer nations.
This would be a disaster for ordinary people, meaning reduced wages and pensions, and massive cuts in public services. Greeks are already getting a taste of this “austerity” medicine.
There are wider problems, however. Attacking wages and public spending means that the amount of money flowing round the economy is reduced. People don’t have as much to spend. And if they don’t have as much to spend, businesses cannot sell as much. They will lay off workers, or go bust.
The economy can get trapped into a vicious downwards spiral. Yet the financial markets will still demand their interest payments, hastening the decline.
Already weak Eurozone economies - Germany included - could be pushed over the edge. A spiral like this helps explain the severity of the Great Depression of the 1930s.
Already, the financial markets have sensed difficulties in the Eurozone bailout. Yesterday’s rally has turned into today’s wobbles. Senior traders are giving the whole bailout package no more than 12 months before it unravels.
But we can start to see an alternative to the grim prospects offered by the EU and the IMF. The strikes and protests in Greece have created a huge political crisis for the government. Anger there is at boiling point.
Resistance of this kind will hold back similar austerity measures across Europe.
The fight is on to create a real political alternative to the EU’s bailouts. This will mean refusing to pay the bankers’ debts, and taxing the rich to pay for public services. For Greece and other euro members, it will mean a quick exit from the single currency.
And above all, it means opening up a challenge to the rule of bankers and capital.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).