EU summit creates austerity pact
In a further heightening of the eurozone debt crisis, the US-based Standard & Poor’s debt rating agency slashed the credit ratings of a number of eurozone countries, including France, Italy and Spain, on January 13.
The credit downgrade follows a December 8-9 European Union summit meeting that did little to end the continuing eurozone debt crisis. Instead, with the exception of UK Prime Minister David Cameron, all the rest of the 26 EU leaders accepted German Chancellor Angela Merkel’s push to impose a fiscal austerity compact that was simply a souped-up version of the 1992 Maastricht Treaty, which on paper committed all EU member states to limit their annual budget deficits to 3% of GDP and their accumulated government debt to 60% of GDP.
As the December 4 London Financial Times commented: “Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance. She rejects eurobonds on the grounds that they reduce pressure on fiscal discipline.”
Cameron vetoed Merkel’s original proposal to have this enshrined in changes to the treaties establishing the EU, not because it would impose brutal government austerity measures upon the EU’s working people, but because it would involve acceptance of a financial services transaction tax. It is estimated that 35% of the revenues from any financial transactions tax would be paid by London-based banks. Cameron was worried that such a tax could mean a switch to other financial centres like New York or Switzerland.
Following Cameron’s veto, the 17 nation-states that use the euro as their common currency plus the other nine EU members that still retain their own currencies decided to accept the Merkel plan through an “intergovernmental agreement” rather than EU treaty amendments.
Under this plan, EU governments (with the exception of the UK) agreed that each of them must run an annual “structural deficit” of no more than 0.5% of GDP and achieve overall balanced budgets. A structural deficit is supposedly calculated by taking out that part of government spending that changes with the booms and busts of a capitalist economy’s business cycle. So it is supposed to measure the “underlying” difference between a capitalist government’s revenues and spending.
Government deficits are financed by borrowing from private banks, and continued borrowing leads to an accumulation of debt. The ability to pay off this debt is measured by a country’s debt relative to its GDP, referred to as its debt-to-GDP ratio. If a country’s debt-to-GDP ratio gets too high, private investors will worry that the government will either default on this debt or will deflate its value by engineering a high inflation rate.
Under the Merkel plan, any EU government that fails to meet the “structural deficit” target will be automatically subject to a fine equivalent to 0.2% of annual GDP unless a “qualified majority” (87%) of EU member-states agree to let it off. Also, under the Merkel plan, EU governments agreed that if their public sector debt ratios were above 60% of GDP, they must take steps to reduce it to that level over the next 20 years. For Germany, with a debt-to-GDP ratio of 87%, that amounts to an annual reduction in debt of 1.3% of GDP each year. But for Italy, with a debt-to-GDP ratio of 120%, it means, in addition to running a balanced budget, finding an extra 3% of GDP or €80 billion — each year until 2032.
As for the Greek government, it means (even after the default of 50% its debt owned by the private banks) paying off around an extra 4% of GDP — €16 billion — a year until 2032. This is in addition to having to find the funds to meet its interest payments to Greek government bondholders, which will amount to €12.75 billion next year. Under the Merkel plan, in 2012 alone the Greek government would have to devote two-thirds of its revenue (excluding income from asset sales) to its bondholders!
Australian Associated Press reported on November 19 that while the Greek government had earlier hoped to raise €5 billion this year from privatisation sales, finance minister Evangelos Venizelos said he planned to raise only raise €1.8 billion by December 31.
As for the eurozone debt crisis itself, the December EU summit decided only that the European Stability Mechanism that will replace the emergency €440 billion European Financial Stability Facility in July 2012 (instead of June 2013) as a permanent rescue funding program for heavily indebted eurozone governments is to be capped at €500 billion. By comparison, the total eurozone government debt exceeds €9.5 trillion!
The adoption by the 17 eurozone governments of the Merkel austerity pact will, if anything, simply make the eurozone debt crisis worse. By requiring eurozone governments to cut government spending, it will push these countries toward a new recession, thus boosting the heavily indebted countries’ government debt-to-GDP.
Merkel was quoted in the December 5 Financial Times as saying that her fiscal austerity plan was aimed to “show that Europe is a ’safe place to invest’”. This reflects the neo-liberal policy that all developed capitalist governments have pursued since the early 1980s, with the exception of the “Keynesian moment” of 2008 (when these governments briefly turned to massive deficit spending to bail out insolvent banks and to avoid a slide into economic depression).
Misreading root of crisis
Merkel clearly believes that the root of the current crisis is that some European governments have “overspent”. In fact, the countries with the worst crises have big deficits and debts as a consequence of the economic crisis — the 2008-09 Great Recession and the accompanying global financial crisis — rather than as a consequence of big deficits.
As Martin Wolf pointed out in the December 6 Financial Times, on the “Maastricht” criterion of budget deficits of less than 3% of GDP, all the crisis-hit countries were doing fine before the Great Recession, except Greece (on revised figures, though not on the figures cited at the time). Before 2007, the four “worst” governments for deficits after Greece were Italy, France, Austria and Germany! “After the [economic] crisis, the picture changed, with huge (and unexpected) deteriorations in the fiscal positions of Ireland, Portugal and Spain (though not Italy). In all, however, fiscal deficits were useless as indicators of looming crises”, Wolf noted. And relying on the criterion of public debt, “Ireland and Spain had vastly better public debt positions than Germany”.
“If the most powerful country in the eurozone refuses to recognise the nature of the crisis”, Wolf correctly observed, “the eurozone has no chance of either remedying it or preventing a recurrence”.
The downgrading of sovereign debt, especially that of France, will intensify the debt crisis of many European countries, increasing their borrowing costs and further undermining confidence in their solvency. Since France is one of the major underwriters of the European bailout fund, its creditworthiness will now be in doubt. In its statement announcing the credit downgrades, S&P said it would soon be issuing credit evaluations of international financial organisations, including the EFSF.
Explaining the downgrade decision, S&P wrote that it expected growing popular anger across the eurozone at government austerity measures that have already plunged millions into unemployment and poverty. “We believe there is a risk that reform fatigue could be mounting, especially in those countries that have experienced deep recessions and where growth prospects remain bleak.” It warned that “lower levels of predictability exist in policy orientation”.
Hopes have also faded that a deal will be reached between the Greek government and the private holders of €200 billion of Greek government debt on these bondholders taking a 50% reduction in previously held Greek government debt. According to the January 22 British Guardian, “After being close to a breakthrough, the high-stakes talks — aimed at averting a Greek default by slashing the country’s monumental debt load — were set back when the International Monetary Fund and Germany insisted that investors agree to reduced interest rates on new bonds …
“Private government debt holders, including banks, insurers and hedge funds, had reportedly reached an agreement on interest rates averaging 4% before official creditors including the IMF and the European Central Bank, called for yields to be no higher than 3.5%, citing the deteriorating Greek economic outlook.
“Previously, the Greek finance minister, Evangelos Venizelos, had told parliament that the debt reduction plan would have to be in place by Monday [January 22] to give lenders enough time to draw up a second €130bn bailout for the country before the EU’s next summit on 30 January. Private creditor participation has been set as a prerequisite by the EU and IMF for further aid. Without the loans Athens will be unable to meet a €14.5bn bond repayment due on 20 March, triggering a default on its debts.”
Direct Action – March 14, 2012