Angela Merkel’s government shocked markets earlier this week by imposing a ban in Germany on so-called “naked short selling” in euro-area government bonds and in shares of major German financial institutions.
Naked short-selling is gambling on the price of a share or a government bond going down, using a complex transaction to trade shares that the seller does not yet own. The practice has been heavily criticised even within financial markets.
The German government blames short-selling for the continuing chaos in the markets for European government loans. BaFin, the German financial regulator, claimed the move was needed as short-selling was endangering “the stability of the entire financial system”.
Action like this, by the conservative CDU government, is a clear sign of the desperation of Europe’s rulers.
A ruling class divided
But it also shows their lack of direction. Shortly after the German announcement, France’s finance minister, Christine Lagarde, pointedly ruled out a similar move.
Just days after the $1tr European bailout package was agreed by the EU and the International Monetary Fund (IMF), disputes between the major Euro economies have flared up again.
And it has emerged that the bailout was only agreed after Nicolas Sarkozy sensationally threatened in negotiations to pull France out of the euro.
The German ban, by itself, is unlikely to be especially effective. Short-selling is still permitted in other Eurozone economies, and in practice constitutes only a small part of market activity.
Much more rigorous measures would be needed to stamp out speculation. Half-cocked initiatives like this do very little.
Markets have, predictably, reacted badly to the news. Shares have slumped and the price of insuring euro governments’ debt has risen. Merkel will be hoping other countries follow Germany’s lead. But Swedish, Finnish and Dutch governments have come out against the ban.
Germany’s decision is as much about domestic politics as it is about saving the euro. Heavy losses for the CDU in last week’s regional election have been blamed on the unpopularity of the eurozone bailout. Merkel is hoping to shore up some support at home.
The euro is a collective project by Europe’s ruling classes. Domestic political posturing by one major power is weakening that effort.
The euro crisis
At the heart of the euro’s problems are a combination of weak underlying economic growth, and a fragmented political authority.
This did not matter greatly when, during the 2000s, the cheap credit flowed and the resulting property bubbles gave the impression of prosperity. The EU’s neoliberal plans appeared to countries like Ireland and Spain to be delivering the goods.
Euro membership, privatisation, and letting markets run free were the magic ingredients for success.
The banking crisis that began in 2007, and the resultant recession, brought all that to a halt. Bailing out the bankers was hugely expensive, pushing governments further into debt.
Now heavily-indebted, recession-hit countries are trapped by the euro rules. They cannot try to expand their economies without breaking out of the euro. And so they are stuck with “austerity”, cutting wages and public spending to try and balance the books.
But cutting wages and public expenditure will just drag an economy down still further. Less money is spent, so fewer goods are sold, leading to business failures and redundancies.
Back to the 1930s?
This vicious circle helped prolong the Great Depression of the 1930s. Europe faces the real possibility of a similar economic decline today.
Protests and strikes in Greece are holding back on the IMF and EU plans to impose harsh austerity measures there. Attempts elsewhere must meet with resistance. Ordinary people should not pay for the bankers’ crisis. And we need a political alternative to propping up the failing euro project.
CAN’T PAY WON’T PAY
Wednesday 26 May
7pm Conway Hall Red Lion Sq
Tony Benn • Caroline Lucas MP
• Christos Giovanopoulos coalition of the Radical Left SYRIZA • Aris Vasilopoulos SYRIZA • Penny White BASSA • Paul Mackney fmr general secretary NATFHE • Clare Solomon president-elect, University of London Union • John Rees Counterfire • Michael Bradley Right to Work Campaign
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).