Subject: [SocialistWorker.org] The new panic over the euro
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Analysis: Lee Sustar
======== THE NEW PANIC OVER THE EURO =========================================
Lee Sustar analyzes the new wave of fear over the European financial crisis.
May 3, 2012
WITH THE Spanish economy sinking  and 12 countries in Europe mired in
recession , politicians and bankers are once again worried about a
financial meltdown on the continent as the result of the crisis in the euro
Adding to the concerns among politicians and financial policymakers is the
prospect that elections in France and Greece on May 6 could upend the
austerity package agreed to by European leaders last December.
French Socialist Party presidential candidate François Hollande is a
pro-business moderate, but the challenge by left-wing candidate Jean-Luc
Mélenchon put Hollande under pressure to call for higher taxes on the rich
and measures to boost economic growth. If he wins in the second round as
predicted, Hollande will be under pressure break from incumbent President
Nicolas Sarkozy's collaboration with German Chancellor Angela Merkel, who has
demanded that Greece and other countries agree to deep government budget cuts
as a condition for financial bailouts.
Merkel rebuffed Hollande in a recent interview . "There will be no new
negotiations on the budget pact," she said. "Twenty-five heads of government
have signed it."
As the biggest economy in Europe, Germany is wary of being on the hook for
its indebted neighbors, fearful that endless bailouts could wreck its
economy. Thus, in return for German money for bailouts, Merkel has demanded
harsh austerity terms, and that has led to further economic slump and
devastating cuts in the social safety net.
But the commitment of European politicians to austerity has been rejected by
voters. The Greek elections are likely to result in a fragmented parliament,
with a strong presence of left-wing parties, throwing into doubt that
country's agreement to continue the country's disastrous austerity policies.
Since 2008, the Greek economy has shrunk by 13 percent , the kind of
economic contraction unseen since the 1930s. Pay in the private sector is
expected to fall by an additional 16.5 percent over the next two years.
Unemployment is predicted to rise to 19 percent.
The European Union-led "bailout" of Greece did involve wiping out some $131
billion of the country's $460 billion in government debt. But because
Greece's economy continues to contract, the level of debt is predicted to
remain at 120 percent of Greece's entire economic output , even after the
Adding to the urgency is the deepening recession across much of Europe. Among
the hardest-hit countries is Spain , where unemployment has hit 24.4
percent, up from 10 percent in 2008. About half of all workers under 25 years
of age are jobless.
The unemployment figures across the eurozone  signal a deepening
crisis--the jobless rate for the 17-nation currency bloc hit 10.9 percent in
March. Even Germany, Europe's dominant economy, which recently recorded its
lowest unemployment rate since reunification in 1990, saw a small rise in
unemployment in April, canceling out the job gains in the year so far.
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EUROPEAN GOVERNMENTS, having taken trillions of dollars in private debt onto
the public books, face a dilemma. If they take Merkel's medicine and slash
government spending, cut wages, privatize state-owned enterprises and raise
taxes on workers, they will choke off economic growth as unemployment rises
and consumer spending plummets. And as the example of Greece shows, the
shrinking economy will make it even harder for governments to repay debts,
despite the bailouts.
The failure of austerity programs to produce an economic recovery has
compelled politicians to at least call for a "growth pact" in the eurozone,
even if there's been little action so far. The liberal economist and the /New
York Times/ columnist Paul Krugman has decried  "the apparent
determination of European leaders to commit economic suicide for the
Continent as a whole."
But there are huge risks for governments that consider breaking with the
austerity program and trying to spend their way out of debt.
Because the 17 nations that are members of the euro don't control their own
currency, they can't boost spending as easily as they could in the past, when
their central banks could effectively just print money. Governments are also
constrained by the fact that the bond market will force them to pay much
higher interest rates to borrow money unless they cut their budget deficits.
When the bond markets turn their back on a country, as was the case in
Greece, the only available lenders are the "troika"--the European Central
Bank (ECB), the European Union and the International Monetary Fund (IMF). In
return for that money, governments have to agree to austerity--and in the
case of both Greece and Italy, pressure from the troika led to the ouster of
elected prime ministers and their replacement by banker-approved technocratic
But while the troika and policymakers try to pin the blame for the crisis on
spendthrift governments, the reality is that the bailouts are aimed at
shoring up the banks--especially the German and French ones that made big
loans to Greece and other "peripheral" European countries. The bailout funds
simply pass through the accounts in Greece, Portugal and Ireland before
finding their way to into the major European banks.
So if there's an uncontrolled default on government debt by a major European
economy, it could cause a chain of bank failures and create a financial panic
on the scale of the crash of 2008.
To avert such a crisis, European policymakers have taken two major
initiatives. First, European governments and the IMF have agreed to the
creation of a $400 billion European bailout fund that would create a firewall
around Greece by guaranteeing that other governments would have recourse to
emergency loans if needed.
Yet because Spain is Europe's fourth-largest economy--and Italy its
third--that money is nowhere near enough to handle a government debt crisis
or default in those countries. That's why the interest rates that Spain and
Italy must pay to borrow money has been on the rise in recent days--just as
it was at the end of last year.
Back then, the European Central Bank doused the flames by aiding the banks
with emergency loans at a 1 percent interest rate. Known as the longer-term
refinancing operation (LTRO), the loans made over $1.3 trillion available to
the banks --a sign of just how desperate they had become.
Banks in Spain, Italy and other countries used the LTRO money to buy their
own governments' bonds. This had the effect of lowering interest rates for
government borrowing in those countries. With the LTRO seemingly stabilizing
the situation, the year began with happy talk about how the euro crisis was
fading. In fact, the corporate banks were depositing much of the money right
back in the ECB at just a 0.5 percent rate of interest. In other words, the
banks were willing to lose money rather than take the risk of lending it to
another bank that may not be able to pay them back.
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ALL THIS is why skeptical observers, such as the billionaire financier George
Soros, pointed to new problems for the euro. "The crisis has entered what may
be a less volatile but more lethal phase," Soros wrote in the /Financial
As eurozone central banks shift toward buying their own countries' bonds, the
currency bloc will start to unravel, he predicted. In any case, austerity
policies will, as in Greece, strangle economic growth and make debts even
harder to repay, Soros argued: "Whether or not the euro endures, Europe is
facing a long period of economic stagnation or worse."
As the economic crisis drags on, political repercussions will mount. As the
French election shows, political polarization is the likely result, with both
a left-wing candidate and the far-right National Front making unexpectedly
strong showings in the first round presidential campaign. In Holland,
meanwhile, the far-right, anti-immigrant Party for Freedom Party has pulled
out of its coalition with the mainstream conservative party in opposition to
austerity, triggering a new election. In Greece, too, the parliamentary
elections will likely see gains for both the far left and far right.
The stakes in the struggle ahead are therefore high. The far right tries to
posture as being opposed to austerity while concentrating its fire on
immigrants and racial minorities.
The European left, however, has shown it has the potential to push back.
Besides the series of general strikes and protests in Greece, the labor
movement in Spain and Portugal have also mounted some of the largest general
strikes and protests in many years. The challenge is to link those struggles
to a wider resistance to austerity and the fight for jobs and social justice.
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