Greater Manchester Respect

A new phase in the financial crisis

The Euro currency is counting numbered days. Angela Merkel, the German government leader, put an optimistic spin on events of the last week by declaring ‘we're in an extraordinarily serious situation, as far as the situation of the Euro is concerned.’

When the global financial crisis burst into the open with the collapse of Lehman Brothers bank in September 2008, the immediate reason was the unregulated nature of the global banking system and the property market speculative bubble that had burst in the United States. Banks had been bundling up and selling mortgage debt to each other and using it as a form of speculation. Then, the U.S property market overreached itself and prices started to fall. No one wanted to be left holding the mortgage debt. The bigger problem was that such a huge amount of unregulated speculation had built up across the globe that most banks did not even know how much debt they held.

When the dog days of the Bush government let Lehman Brothers collapse in the belief that the market solves all problems the banking system panicked. The result was wholesale nationalization of collapsing banks such as Freddie Mac, Fanny Mae, Citigroup and AIG. British banks were also involved and RBS and Lloyds TSB were nationalized along with the earlier victim, Northern Rock. The governments agreed to underwrite the debts of the banking system without knowing the full extent of the debt crisis. In Britain, banking debt was estimated to be over £2 trillion. This spectre of the government acquiring a huge debt mountain is the engine behind the ConDem austerity programme alongside its ideological belief in the free market.

‘The Sickbed of Cuchculainn’

The Irish banking system was also exposed and the Irish government lent £100 billion from the European Central Bank to cover the bank debts before the latest phase of the crisis began. The combination of very low corporate taxes and a collapse in the Irish property market has left the Irish government bankrupt. International lending markets started refusing to lend money to the Irish government and the result is the proposed deal with the International Monetary Fund (IMF) and the European Central Bank. This will loan €85 billion to the Irish government but at a punitive 7% interest rate, which increases the likelihood of Ireland defaulting on this debt in the near future. British banks have £140 billion of loans to Irish banks, placing the British government in a difficult position. For all the talk of ‘helping a neighbour’ and offering £7 billion, the prospect of paying for a new £140 billion hole in the British banking system is terrifying Whitehall.

The Irish government has been caught playing the free market speculation game. Since the initial phase of the crisis struck in 2008, it has cut public spending and attacked the living standards of the poor. The result has been economic stagnation as the majority has no money to spend. Its response to this new phase of crisis is to repeat the mistake by cutting jobs, public service spending and increasing taxes on the poorest in society while leaving the rich untouched. It will make the problem worse and the government is likely to fall within weeks.

‘Spanish bombs’

 For Europe, the situation is even worse. The Irish financial crisis and the bailout was intended to create a ‘firewall’ to stop the spread of financial panic across Europe, just as happened with Greece. Larry Elliot described it as a new ‘Lehman Brothers moment’. However, all the indications are that the panic is spreading to Portugal, Spain and Italy. Portugal, Belgium and Spain have found the cost of insuring their debts have risen dramatically since Sunday and Spain has found it impossible to raise money. This is highly significant. While Portuguese and Belgian debt can be bailed out, the Spanish debt is more than Portugal, Ireland and Greece combined at £478 billion. It already has 20% unemployment rising to 40% among young people. The international financial markets are already attacking confidence in Spain bringing a major crisis closer. If it happens, there is no certainty that a bailout can be achieved.

As Phillip Booth of the Institute of Economic Affairs noted ‘Europe is trapped in a cycle where debt is being passed round and round in circles – the banks are bust so the Irish government bails them out; the Irish government's debt is owned by other banks and if the government defaults, they go bust’
The common factor in the economic problems in Spain, Belgium, Portugal, Greece, Italy and Ireland is that these countries joined the Eurozone. One of the conditions for Euro membership is that national debt should be 3% of national income (Gross Domestic Product) or below in order to get the Eurozone economies to work in the same direction. None of these economies can do this and it is now clear that they will not be able to without destroying their economies – defaulting on debt repayment is far more likely.

As Graham Turner of GFC Economics noted, the Euro conditions are part of the problem now so it would be better if these countries were no longer linked to the German economy so that they could devalue their currency and invest their way out of the crisis. He noted that ‘it has to be a better option than the present straitjacket of a single currency.’

What now?

The major problem is that the dogma that free markets are the best way to give people jobs, homes and a decent living standard is false. The free market has led to unregulated banking system and property markets that have done enormous damage by huge speculation. The response of governments has been to cut public services and privatize, letting the free market loose on our communities. Jobs, homes and services are now being lost as well. The Irish crisis demonstrates that European governments are intent on more of the same, which can be summed up as ‘if the medicine does not work, kill the patient with it.’

There are choices to be made. Elected governments put policies to voters and are elected on the basis of those policies. When the international financial speculators start withdrawing confidence and funds from a country and the IMF comes calling, there is a choice. Does a government abandon all its policies and commitments to comply with the demands of the IMF and the advocates of ‘shock doctrine’ or does it seek an alternative? No Irish voter has supported the new austerity programme that the IMF has demanded or the loss of national independence in the last few days – why should they agree to accept a loan with 7% interest that will ruin its welfare state? Britain faced the same problem in 1976 when Callaghan’s Labour government abandoned all its manifesto commitments to comply with the terms of an IMF loan. The resultant policies paved the way for Margaret Thatcher and the start of banking de-regulation.

The alternative is a programme that invests in jobs and changes our economic priorities away from helping the rich to make a huge mess of our planet. Corporation tax should be raised and taxes levied on financial transactions. The banks have continued to make huge profits and give bonuses while handing debts to the taxpayer – this must be stopped. The attack on the poorest is not only unfair but will undermine economic demand so makes no economic sense.

There needs to be a programme to curtail the power of the banks and the speculators. Regulation is necessary and the debts cannot just be given to the taxpayer. The credit crisis is now likely to intensify with banks refusing to lend to consumers, home buyers and businesses as they panic about their debts. There must be measures to ensure credit keeps flowing into the economy so a people’s bank needs to be established. The privatization of the Post Office is not the way forward; it should become the basis of the people’s bank.

The Euro was built on the foundation of free market ‘neo-liberalism’ and has come unstuck on it. Sticking with it will only increase the pain in our crisis gripped economies and further increase the attack on public services.

Across Europe, people will be fearful and will be protesting against the effects of this crisis. It will come in attacks on the poor and public services. This resistance must be given a voice and can form part of the basis for offering an alternative to the chaos in the world’s financial system. The governments of Europe have choices. They can choose to follow neo-liberal mantras that have failed and will continue to fail. They can choose to slash public services and let the rich get away with gambling with everyone’s future. Or they can choose an alternative model based on taxing the rich, investing in jobs and welfare and defending public services.