Greek economy tremors shake eurozone foundation

The economic crisis in Greece is sending shockwaves through Europe’s financial and political infrastructure. The threat of debt default has fuelled feverish speculation on bond markets. The only issue on which the EU and Greek political establishment agrees is that the working-class will have to pay through savage cutbacks. This, in turn, is sparking social upheaval. Greece, currently the weakest link in a series of weak eurozone links, has triggered a severe crisis for the common currency. The euro crisis, moreover, will have a serious impact, not merely on the eurozone, but for European capitalism as a whole. The spectre of Greece defaulting on its debts is pushing up the cost of borrowing for other heavily indebted countries, like Spain, Portugal, Italy and Ireland. A Greek default (even though Greece accounts for only 2.5% of the eurozone GDP) would pose the question of the viability of the euro as a common currency. A breakup of the eurozone, which is now being seriously contemplated by some of the strategists of capitalism, would also provoke a convulsion in the world finance and currency system.

For a start, a Greek default could cause the collapse of some of the European banks holding Greek government bonds (totalling about €300bn), provoking a new phase of crisis in the global banking and financial system. Greece is the trigger, revealing the contradictions inherent in the common currency. When the global banking/financial system faced meltdown in 2008, the major capitalist powers stepped in with an estimated $18 trillion of capital injections and guarantees. They effectively nationalised the losses of speculative investment banks. At the public’s expense, they rescued banks and other speculative vehicles from the consequences of their own reckless gambling on global markets. Now, however, the major EU powers are refusing to guarantee a mere €300 billion of Greek debt. They are promising ‘solidarity’ with Greece, which is intended to reassure the financial markets that they will not allow a default. However, they have so far refused to come up with a concrete package of financial support. At the same time, they are demanding more and more savage cuts from the Greek government – cuts to be imposed on the Greek working class. To reduce the current budget deficit to 3% of GDP (the EU’s Economic and Monetary Union ‘norm’), would require a cut in GDP of between 12-15%, which would have the effect of a major slump in the economy.

The ‘reforms’ demanded by the EU powers, led by German capitalism, have been called appropriately a ‘tsunami of attacks’. Cuts on the scale now being proposed would savage social services and bring huge increases in taxes, beginning with VAT. Moreover, these misnamed ‘reforms’ are being put forward by a ‘socialist’ (PASOK) government of George Papandreou. However, the tsunami has already been met by ‘rivers of fury’, with a series of massive, nationwide strikes and protests. "The bureaucrats in Brussels want… to see blood on the streets of Athens", wrote one mass newspaper. "We are at war with the government", commented a former left MP, "because it is clearly at war with us". "Why should I as a worker pay for the errors in policies?" asked one teacher on a public-sector demonstration. "The worker can’t be the scapegoat. So we have to defend ourselves". A few capitalist commentators, however, are warning that cuts on the scale now being proposed in Greece will cause an explosive social and political reaction, not just in Greece but throughout Europe. "If you tighten the way the markets seem to want, you will get a political response that is nonviable", commented Joseph Stiglitz, an economist who advocates Keynesian policies. "These are democracies – not dictatorships".

The events in Greece, which will be echoed in Spain, Portugal, Ireland and elsewhere, mark a new period of social revolt and political struggles that will reverberate around Europe. Greece is one of the weakest of the European capitalist states. Its accumulated national debt is almost €300 billion, about 112% of GDP – and this is expected to rise to 130% by 2013, unless there are savage cuts in spending combined with tax increases. Moreover, the current debt may be even higher than it appears in the national accounts, due to the use of various complex financial instruments designed to hide the real level. The huge mountain of debt has been accumulated through the gross mismanagement of successive governments, and has certainly not benefitted the Greek working class. There is massive tax evasion, for instance, among the wealthy and even the prosperous middle class. Only workers, who have their tax deducted at source, actually pay official levels of tax. It is estimated that the government loses €30-40 billion a year through tax evasion. Corruption is rife throughout the state bureaucracy.

Greece was hit hard by the global recession, with a 1.1% fall of GDP last year and an estimated 1% fall coming during 2010. The slump has resulted in mass unemployment, especially among the youth. Greece’s national debt was accumulated over a period and was no secret. However, the debt crisis was provoked in December when the Fitch rating agency downgraded Greek bonds from A-minus to BBB. This pushed up the rate of interest the Greek government had to pay on its bonds to almost 7%, 3.8% above benchmark German government bonds. The ‘bonds market vigilantes’, the big global bond traders, began to raise the spectre of a default by the Greek government. This inevitably raised similar doubts on financial markets about other heavily indebted economies, particularly Spain, Portugal and Italy. The Eurozone conomies have been severely hit by the global downturn. There was a fall from peak to trough of -5% (compared, for instance, with a 3.8% fall in the US economy). The latest figures for the fourth quarter of 2009 show negligible growth in the biggest economies, Germany and France, with continued negative growth in the peripheral countries: Portugal, Italy, Greece and Spain, unflatteringly known as the PIGS – or PIIGS if Ireland is included.

The eurozone downturn has been exacerbated by the common currency. The rise in the value of the euro during the downturn (mainly because of the decline of the US dollar), raised the export prices of euro economies when there was a sharp fall in world demand for exports. At the same time, the divergence between the eurozone economies is now threatening a deep crisis for the euro itself. Germany, the Netherlands and France, for instance, have been able to implement debt-finance stimulus packages. The debt-laden PIGS, however, do not have that luxury, as the ‘markets’ (ie banks and speculators) are not prepared to tolerate Keynesianism in the weaker economies.


At the same time, the euro yokes economies with large current account surpluses (for example, Germany, the Netherlands) with economies with big current account deficits (the current account is the trade balance plus current payments, such as repatriated profits). With separate currencies, the currencies of surplus countries would tend to appreciate while those of the deficit countries would decline, tending to correct the imbalances. This is not possible within the one-size-fits-all eurozone.Portugal, Italy, Greece and Spain are all to varying degrees heavily laden with debt, whether in the public sector, the business sector, or household indebtedness. Greece is currently running a budget deficit of 12.7% and an accumulated national debt of €112 billion. The boom time growth in Spain and Ireland, moreover, was heavily dependent on housing bubbles, which have now deflated. The peripheral economies took advantage of low eurozone interest rates and cheap credit to finance their debt-driven growth. Although every government issued its own bonds, the apparent ‘security’ of the euro enabled them to borrow money at lower interest rates than otherwise.

As separate economies, governments of whatever complexion might have raised interest rates to try to curb the growth of bubbles. In the eurozone, however, the European Central Bank (ECB) set a common, low rate which particularly suited larger economies like Germany. The prevalence during the previous upswing of low interest rates and a high euro, which favoured surplus exporters like Germany, the Netherlands and France, encouraged profligate spending and borrowing in the weaker economies.

The crisis in the eurozone’s periphery is not an accident: it is inherent in the system. Under the EU’s Economic and Monetary Union (EMU) and ‘stability pact’, current deficits are limited to 3% of GDP, with national debt limited to 60%. It was widely suspected when Greece entered the eurozone in 2001 that the government cooked the books to meet the ‘convergence criteria’. With the onset of crisis, however, the EU Commission, the ECB and, ultimately, the major eurozone powers (Germany and France) were forced to accept much higher levels of deficit and national debt not least because they exceeded the norms themselves. This highlights the basic contradiction of the eurozone: the 16 countries are participating in a currency union, but without the basic elements of a political union. There is no centralised economic power capable of keeping the different national economies within the norms required by a stable euro currency. The EU Commission and ECB have periodically admonished national governments for breaching the rules, but have been effectively powerless to curb their expenditure.

There are no eurozone institutions, for instance, with powers similar to the International Monetary Fund (IMF). If it is called in to support a floundering currency, the IMF has draconian powers of surveillance, and has imposed draconian conditions for loans. This is why Merkel, Brown and others now favour the intervention of the IMF in Greece. By turning to the IMF, however, the ECB and eurozone would signal their own weakness. In fact, such a move could further undermine the euro. Now, however, faced with the prospect of a breakup of the eurozone, the key economies, particularly Germany, are demanding savage cuts from Greece and the other peripheral economies. This is the price they will try to exact for preventing a default by the Greek and other governments. The major eurozone powers, especially Germany, are averse to specifying a rescue package for Greece. They have confined their support to vague promises of ‘solidarity’ in the hope that this will reassure financial markets. As the International Herald Tribune comments (6 February): "There is still a game of chicken among sovereign states, with Greece counting on help and other countries holding back until Athens pays a steep price for its profligacy and manipulation of statistics".

"It’s highly unlikely Greece will be allowed to default", economist Antonio Missoroli commented. "But no one wants to say that out loud to take the pressure off the Greek government. So it’s a fragile balancing act, how much pressure can you exercise on Greece and how much can it bear?" Another commentator, Simon Tilford, said that "the EU wants to humiliate the Greek political establishment and to see them taking difficult decisions". This is a dangerous game. A Greek default, under pressure from financial markets, could trigger a domino effect throughout the eurozone. Yet even after the European summit on 10/11 February, the subsequent meeting of European finance ministers on 15 February demanded even bigger cuts. This was despite the Greek government’s promise to cut its deficit by four percentage points to 8.7% of GDP by the end of this year – in itself a savage and politically explosive reduction.

Economics of the farming price war

For years suppliers and farmers have complained that they have been bullied by the big supermarkets. They claim that the massive buying power of the supermarkets has forced them to accept unreasonably low prices and unreasonable terms. The National Farmers Union has been a vocal leader of these protests. Now the government has acted. The Groceries Supply Code of Practice came into force last month. Under the auspices of the Competition Commission, the large supermarkets have agreed to a code of conduct that will regulate their relationships with their suppliers. The farm lobby has achieved a measure of success. The farmers - or those they pay to do their PR - have managed to build a considerable body of public support.
They appear to have gone a long way towards eradicating the once popular image of a "poor" farmer running his farm from a newly registered Range Rover. On the face of it, supermarket shoppers are sufficiently sympathetic with the farmers' plight that they are prepared to pay the higher prices that would follow if the suppliers had their way.

Of course, supermarket shoppers are highly unlikely to willingly pay higher prices when it comes down to it. But then it is most unlikely that they will be asked to pay them, at least not as a result of this new code of practice. Under the terms of the new code, supermarkets will not be able to change supply terms retrospectively. They will have to keep a written record of their negotiations with suppliers and suppliers will not be charged when the supermarket runs a promotion on their products. The Competition Commission also proposes that there should be an ombudsman to "arbitrate on disputes between grocery retailers and suppliers and investigate complaints." After a close look it becomes clear that the new code amounts to very little. There is nothing in the new arrangement that will do anything to prevent the supermarkets exercising their enormous buying power to put downward pressure on agricultural prices as well as prices on non-agricultural goods from small suppliers. And prices are what the dispute between suppliers and supermarkets has always been about. Other issues are largely peripheral.

This outcome is hardly surprising. This is a capitalist market society. Prices are the outcome of the forces of supply and demand. The supermarkets are competing against one another. They are also competing against the many small businesses that continue to survive. To compete successfully supermarkets have to provide food that is of comparable or near comparable quality to that obtainable elsewhere and that is at least as cheap. They will continue to bargain hard with their suppliers. The farmers, for their part, may complain and may say that the prices they are getting are so low they are being driven out of business. The supermarkets however will not be convinced. They will only pay higher prices when they have to. And when they have to is when sufficient farmers have gone out of business to restrict the supply of goods and when the price of farm produce therefore starts to rise. Before we start sympathising with the farmers, there are a couple of considerations.

First, farmers have long been willing participants in a very large market for foodstuffs. They know that the prices of the goods they produce will be subject to supply and demand factors. Most people are unlikely either to be farmers on the one hand or owners of a large supermarket on the other hand. We can indulge in taking a largely detached and dispassionate position. We can observe these two significant sectors of our economy engaging in their competitive market behaviour - the supermarkets trying to buy at the lowest possible price, the farmers trying to sell at the highest possible price. The supermarkets appeal to us, the consumers, by offering low prices for goods on the shelf. The farmers appeal to us claiming they are being bullied out of business by the supermarkets who pay such unfairly low prices. We know that there's no such thing as a "fair" price in capitalist markets. Farmers are victims of a market economy they themselves have long supported because it has, on the whole, been very good to them.

That description of the market would be true but for the awkward fact that the agricultural market is not particularly "free." Under the present Common Agricultural Policy, British farmers receive approximately £3 billion in subsidies from the government. Until 2003 these subsidies were paid to farmers on the basis of guaranteed prices for what was produced. Today only some crops receive specific subsidies and these have been reduced. Instead farmers receive about £230 for each hectare of land they keep in cultivation. In addition they get subsidised for work they may do to enhance the environment. This method of subsidising means that the larger the farmer, the larger the subsidy. The richest farmers get the biggest subsidies. In such circumstances it's difficult to feel too sympathetic towards the farming community. All in all, farmers already receive more state help than any other privately owned sector of the economy - or at least they did until the banking crisis.

Home wreckers: New Labour's housing policy

There is a crisis in affordable housing across Britain. In one area you can expect to be on a housing waiting list for 90 years. The crisis in housing has reached an epic scale. A property is repossessed every 10 minutes. Some five million people are on housing waiting lists. And millions more spend each night in damp, insecure or overcrowded accommodation. They are all victims of a housing crisis created by free market dogma and the decimation of council housing – first under the Tories and then Labour. Housing charity Shelter has found that a quarter of all households – whether owned or rented – say that worry over housing costs is causing them stress or depression. Shelter figures show that a quarter of households are dealing with soaring housing costs by cutting back on food.

Three million households have had to sell possessions to pay for housing. One in 10 have taken on an extra job or overtime to try to meet the costs. Housing is a political crisis for the main political parties. For over a quarter of a century, British governments have been geared towards a single goal – encouraging private home ownership. Ever since Tory leader Margaret Thatcher introduced the “right to buy” for council tenants in 1980, both Tory and Labour governments have promoted the idea of a “property owning democracy” where housing is determined by the market rather than the state. Combined with the chronic shortage of council housing, it’s easy to see why millions of people despair of ever having a secure and settled place to call home.

Disgracefully, at the same time as people struggle to find a decent place to live, hundreds of thousands of privately owned properties in Britain lie empty; some 300,000 private homes in England have been empty for more than six months on top of 75,000 in Scotland. If you include second homes in the figures, then there are about 700,000 empty properties in England. The speculative buy-to-let boom has resulted in even more empty flats that no one can afford to buy. In Leeds alone, 70 percent of city centre apartments are unoccupied. In Liverpool 35 percent of city centre flats are left empty by owners waiting for prices to rise. New Labour’s dogmatic insistence on “market solutions” will do nothing to solve the crisis – the market is responsible for the mess in the first place.

Housing in rural areas is no better. People applying for an affordable home in the ten rural districts with the longest waiting lists face a wait of up to 90 years, on average, before enough new homes will be built to clear the backlog. In the East Riding of Yorkshire, the worst affected area, it would take 280 years at the current rate of building for all the homes that are needed to be built. The market has failed. It has led to nothing but homelessness and exploitative private rents. This is the reason why subsidised and council-owned housing was introduced in the first place. Shelter has calculated that the number of council and housing association houses available for rent is at the lowest level for 50 years. The housing charity warns of a “growing chasm between the number of homes required and the number available”. The number of households in temporary accommodation rose by 135 percent between 2001 and 2008. Many people no longer bother to put their names on council lists because they see no hope of ever getting a council home.

Between 1980 and 2005, almost 450,000 council homes for rent have been sold at large discounts. The result is that last year there were only 599,000 council properties available to rent from UK local authorities. In comparison, in the year prior to Thatcher’s election in 1979, some 100,000 council properties were built, while the private sector built approximately 150,000 new homes for sale. Almost half the population lived in council homes in England in 1979. The proportion was even higher in cities like Sheffield, where council rentals approached two thirds of all rented housing. Today, local authorities house just 12 percent of the British population. Another 6 percent of live in properties managed by housing associations. The government’s solution has been “regeneration schemes” and yet more use of the private sector. The “regeneration” of Grahame Park in Barnet, North London, sums up what these policies mean. Some 1,771 council flats will metamorphose into 1,220 “affordable” homes and 2,220 private homes under the scheme. It’s unlikely that many of the original tenants will have the “right of return”.

The growth of housing associations has taken place alongside a decline in the number of people in decent rented accommodation. What’s more, the government’s reliance on them is in crisis as the debts of housing associations get out of control. Even the government’s help for those in trouble with their mortgage is falling apart. The government’s mortgage rescue scheme launched this January has helped only six families, not the 6,000 it targeted. Subsidised housing is the only serious way to house people fairly and rationally and council housing – which is democratically controlled by tenants – is the best way to do that. Until the government recognises that fact, the misery and insanity caused by the market will continue.