Suspicion and gloom prevail all over Europe as it begins to dawn on the members of the world’s second largest economy, namely the eurozone, that crucial issues such as unemployment, education and health care have put people’s lives at grave risk. This is not to say that the elite leadership of Europe has not been aware of these serious problems confronting it, as it faces an agitating and demanding European public. Public opinion is always demanding and knows what it wants. And when no efforts are made by the leadership to convince the public, any amount of structural change will not help end the continent-wide recession.
What is the crisis about?
The European debt crisis is the shorthand term for Europe’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. In fact, the head of the Bank of England referred to it as “the most serious financial crisis at least since the 1930s, if not ever,” in October 2011.
How the crisis begin?
The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues – making high budget deficits unsustainable. The result was that the new Prime Minister George Papandreou, in late 2009, was forced to announce that previous governments had failed to reveal the size of the nation’s deficits. In truth, Greece’s debts were so large that they actually exceed the size of the nation’s entire economy, and the country could no longer hide the problem.
The Conundrum in Greece
It is estimated that the gross public debt in Greece will be 160 per cent of the gross domestic product (GDP) by 2013. With no collateral in the Greek banks, Athens might impose a new currency. As Martin Wolf argues in the Financial Times, “This would spell chaos. Unpaid police officers and soldiers are unlikely to keep order. Looting and rioting could occur. A coup or civil war would be conceivable. Any new currency would depreciate and inflation would soar… A flight to safety, to Germany or beyond the eurozone, could accelerate.”
European governments response to the crisis
The European Union has taken action, but it has moved slowly since it requires the consent of all 17 nations in the union. The primary course of action thus far has been a series of bailouts for Europe’s troubled economies. In spring, 2010, when the European Union and International Monetary Fund disbursed 110 billion euros (the equivalent of $163 billion) to Greece. Greece required a second bailout in mid-2011, this time worth about $157 billion. On March 9, 2012, Greece and its creditors agreed to a debt restructuring that set the stage for another round of bailout funds. Ireland and Portugal also received bailouts, in November 2010 and May 2011, respectively. The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide emergency lending to countries in financial difficulty.
The European Central Bank also has become involved. The ECB announced a plan, in August 2011, to purchase government bonds if necessary in order to keep yields from spiraling to a level that countries such as Italy and Spain could no longer afford. In December 2011, the ECB made €489 ($639 billion) in credit available to the region’s troubled banks at ultra-low rates, then followed with a second round in February 2012. The name for this program was the Long Term Refinancing Operation, or LTRO. Numerous financial instituions had debt coming due in 2012, causing them to hold on to their reserves rather than extend loans. Slower loan growth, in turn, could weigh on economic growth and make the crisis worse. As a result, the ECB sought to boost the banks’ balance sheets to help forestall this potential issue.
Although the actions by European policy makers usually helped stabilize the financial markets in the short term, they were widely criticized as merely “kicking the can down the road,” or postponing a true solution to a later date. In addition, a larger issue loomed: while smaller countries such as Greece are small enough to be rescued by the European Central Bank, Italy and Spain are too big to be saved. The perilous state of the countries’ fiscal health was therefore a key issue for the markets at various points in 2010, 2011, and 2012.
Political Issues Involved
The political implications of the crisis are enormous. In the affected nations, the push toward austerity – or cutting expenses to reduce the gap between revenues and outlays – has led to public protests in Greece and Spain and in the removal of the party in power in both Italy and Portugal. On the national level, the crisis has led to tensions between the fiscally sound countries, such as Germany, and the higher-debt countries such as Greece. Germany pushed for Greece and other affected countries to reform the budgets as a condition of providing aid, leading to elevated tensions within the European Union. After a great deal of debate, Greece ultimately agreed to cut spending and raise taxes. However, an important obstacle has been Germany’s unwillingness to agree to a region-wide solution – such as the issuance of bonds by all 17 countries in the Eurozone – since it would have to foot a disproportionate percentage of the bill.
The tension has created the possibility that one or more European countries would eventually abandon the euro (the region’s common currency). On one hand, leaving the euro would allow a country to pursue its own independent policy rather than being subject to the common policy for the 17 nations using the currency. But on the other, it would be an event of unprecedented magnitude for the global economy and financial markets. This concern contributed to periodic weakness in the euro relative to other major global currencies during the crisis period.
The solution: Fiscal Austerity
According to Shamus Cooke, a trade unionist and writer for Workers Action, “working people in the US need to learn to speak Greek, and adopt an increasingly popular slogan that rejects austerity measures: Tax the Rich! In other words, make the rich pay for the crisis they created. In practice this means that, instead of massive job reductions, cuts to education and health care, taxes on the wealthy and corporations should be raised; the banks should be put under public control rather than being bailed out with public money; the public sector should be fully funded and expanded rather than privatised and slashed. Austerity is when the wealthy attempt to push the effects of their recession onto the backs of working people, who need only to collectively push back and force the 1 per cent to pay instead.”
To sum it up
But overall, as was evident in the economic crisis of 2008-9, the capitalists very cleverly and strategically take advantage of enlarging profits, consolidating the hegemony of capitalism that ensures the widening of inequalities between capital and the working class, and the creation of huge reserves of labour to multiply their profits. The Greek scenario is a harbinger of future financial excesses that might lead to another Great Recession. Business-school rhetoric is no solution to the daylight robbery implicit in the various agendas of globalisation. The ever-rising inequality between the college-educated professionals and working-class citizens around the world has struck fear deep in the hearts of the common people.
The debacle clearly has occurred not only because of the mistrust of the bureaucratic elites who live under the illusion that they know what is best for their countrymen, but also because of economic stagnation. Europe has lagged economically for the last 25 years since Maastricht. To effectively handle the serious situation, the people of Europe must begin to have faith in a united euro. On the other hand, the choice before the creditor nations is to ensure an economically stronger eurozone or else prepare for persistent economic crises that would engulf the world spasmodically.