The euro zone - a 21st century Titanic?


A spectre is haunting Europe: the spectre of bankruptcy. At the centre of the European debt crisis is Greece, whose government and investors owe US$130 billion to European banks. Ireland, Portugal and Spain have public and private loans of US$463 billion, US$194 billion and US$642 billion respectively to European banks. Additionally, hundreds of billions of dollars of insurance on these loans was sold by US and UK banks.

European bankers and governments are fearful that these countries are likely to follow a similar cycle to Greece. Defaults across them would bring the world financial system to a halt. The Lehman Brothers’ losses were US$631 billion in total. A default by Greece on its loans could create a domino effect in the European banking sector, creating a potentially deeper recession than that which followed Lehman’s collapse in 2008.

Saving first class

Italy’s finance minister, Giulio Tremonti, addressing the country’s Senate on July 18, expressed the fear that has gripped European financial markets. “There should be no illusions about who will be saved”, he said. “Like on the Titanic, the first-class passengers won’t be able to save themselves.”

Italy, the third largest economy in the euro zone, now has a public debt of more than US$1.5 trillion, or 120% of its GDP. Tremonti is determined to make sure that it is the third-class passengers – working people – who foot the bill. Declaring “Either we move forward or we go down”, Tremonti proposed a four-year austerity plan to reduce Italy’s budget deficit to 0.2% of GDP by 2014, from 4.6% last year. A cut of nearly nearly €48 billion ($A63.4 billion) from state spending is planned through cuts to subsidies to regions, new charges for health services and a freeze on public sector salaries and hiring, as well as a new round of privatisations of local utilities starting in 2013.

Italy’s austerity plan follows a new savage round of austerity measures passed by the Greek parliament on July 2, aimed at securing more European Union and International Monetary Fund loans, following the failure of harsh austerity measures imposed a year ago to reduce Greece’s enormous public debt.

On June 29, the Washington Post reported, “The emergency loans expected to be made available to Greece will pay its bills for perhaps only two more months”. The fear of a Greek government default and spiralling interest rates for loans for other heavily indebted European countries have spread panic among investors across the euro zone.

On July 5, Moody’s Investor Services downgraded Portugal’s debt rating to “junk” status. A week later Ireland’s rating was similarly downgraded. At the same time, a combined assault by hedge funds and rating agencies forced up the interest rate on Italian government bonds, prompting a new panic over Italy’s debt. In Britain (which remains outside the euro zone), public debt stands at nearly US$1 trillion, or almost half of the country’s GDP.

‘Orderly’ default

Seeking to avert the panic created by the prospect of a Greek default, European finance ministers met in Brussels on July 21 to iron out a repackaging of the debt with lower interest rates over longer periods. However, this new package is simply a shuffling of the deck chairs; it cannot mask the fact that the Greek ruling class is unable to pay its bills. The pact between EU leaders, which extends the terms of the country’s loans and reduces interest rates, is considered by many economists to be a default, if an “orderly” one.

Austerity measures in Greece, Spain, Portugal and Ireland have come thick and fast since the 2008 capitalist economic crisis brought a sudden halt to an economic boom. Between 2000 and 2007, the Greek economy grew at an annual rate of 4.2%. During the boom years, European banks were happy to lend money. But, after the 2008 collapse of Lehman Brothers, credit dried up and interest rates soared. In two of Greece’s largest industries – tourism and shipping – revenues fell by 15% in 2009.

In late 2009 the newly elected social-democratic PASOK (Panhellenic Socialist Movement) government announced that the 2009 budget deficit was around 13.6% of GDP. This had been hidden by the conservative New Democracy government, which had claimed that the deficit was just 6-8% of GDP.

Successive Greek governments had hidden the total debt, with the use of credit derivatives and the help of Goldman Sachs. This was done to allow Greece to be admitted to the euro zone, the economic and monetary union of 16 European Union states that have adopted the euro as their currency. Under the Maastricht treaty, strict criteria were set for admission to the zone, including limits on the ratio of government debt and deficits to GDP, as well as limits on interest and inflation rates in relation to other euro zone economies.

In the wake of the debt revelation, Greece’s credit rating was downgraded. Bond markets either refused to roll over Greek government debt or demanded higher interest rates for new loans. On April 27 last year, the Greek rating reached “junk” status. The credit rating agencies that designated Greek government bonds as “junk” are the same ones that gave triple-A ratings to billions of dollars in US sub-prime mortgage securities.

Bailout = austerity

The PASOK government requested an EU-IMF bailout package in order to avoid default. The EU and IMF agreed to provide €110 billion (US$150 billion) in emergency loans, the biggest bailout in history. But the price for Greek working people was harsh. Austerity measures passed by the parliament on May 6 last year included steep tax increases, a three-year freeze on public sector wage increases (and cuts to bonuses), an increase of the retirement age for public sector workers from 61 to 65, reduction of state-owned companies from 6000 to 2000 and across-the-board increases in value added tax. Publicly owned transport and energy utilities would be privatised.

PM George Papandreou told parliament that the cuts were part of a fundamental restructuring of the economy. “The emergency measures are the condition for us to regain our credibility and … make the big changes that were delayed for years”, he declared.

The same rhetoric has been employed by politicians in Ireland and Portugal. Ireland has met targets set for its €85 billion bailout from the EU and IMF last November, but another bailout looks unavoidable. “Ireland is a cork bobbing on a very turbulent ocean at present”, finance minister Michael Noonan said on state television on July 12.

In Portugal, newly elected Social Democrat Prime Minister Pedro Passos Coelho has begun implementing savage austerity measures as a condition of the country’s €78 billion bailout. In Spain too, the Zapatero government has imposed austerity worth €15 billion as a condition of European bank loans. In each case, public sector wages, jobs and social services have been cut and access to pensions reduced.

Politicians and bankers would have us believe that Greece’s debts are a result of the laziness of Greek workers and too much spending on welfare. But, according to a poll published by the Groningen Growth & Development Centre, between 1995 and 2005, the Greek workforce worked the most hours of any European nation, an average of 1900 hours per year, followed by Spanish workers (1800 hours). Among OECD countries, average working hours in Greece are surpassed only by South Korea, according to a 2008 article in Forbes magazine.

Last year’s austerity measures have accelerated the collapse of the Greek economy. Between March 2010 and March 2011, industrial production declined by 8%. Building construction declined by 73.1% between January 2010 and January 2011. Retail sales declined 9% between February 2010 and February 2011. Unemployment continues to skyrocket. More than 800,000 Greek workers (16% of the workforce) are unemployed. Youth unemployment is estimated at 36%.

In June, Standard and Poors lowered Greek sovereign debt to a CCC rating, the lowest in the world. In response, the government announced a further round of austerity to secure yet more bailout money from the IMF and European Central Bank. Among the measures passed by the parliament on July 2, in response to EU demands, were a 10% cut in public spending, a one-third cut in the public wages bill and further privatisation.

‘Structural adjustment’

In response, the streets of Athens and other cities were filled for weeks with angry demonstrations. The two major union federations called first a 24-hour strike and then a 48-hour strike. In the midst of the crisis, Papandreou proposed a national unity government to New Democracy, the conservative opposition. The offer was rebuffed, New Democracy hoping to keep its electoral support intact until it wins government in its own right and continues Papandreou’s austerity.

These measures may yet prove a dead letter as the public grows angrier at politicians’ failure to stem the crisis. Both PASOK and New Democracy see acceptance of the dictates of their EU masters as the only option. Exit from the euro zone might mean a worthless currency, soaring inflation, a collapse of investment and massive unemployment. Whether inside or outside the euro zone, the future for capitalist Greece looks grim.

The austerity plans pushed in Greece and other European countries closely resemble the “structural adjustment programs” pushed by the IMF in Latin America, Africa and Asia during the 1980s and 1990s. These plans demanded the privatisation of land and public enterprises, cutting social services and the reduction of living standards by slashing government employment and lowering public and private sector wages. The beneficiaries were the capitalists perched at the topic of the economic pyramid.

Such policies typically required brutal repression, similar to that meted out by riot police on the streets of Athens. When police forces proved incapable of suppressing powerful social movements, the facade of democracy was removed and military regimes were established, often with the help of US military intervention.


Over the last decade, Latin America has had a resurgence of popular movements and class struggle, driven by a revulsion towards decades of neoliberalism. Venezuela’s Bolivarian revolution has wrested control of the country’s substantial oil wealth from the country’s capitalist class and – for the first time since the 1959 Cuban revolution – has begun to dismantle capitalist power, opening the door to a socialist transformation of the economy and society.

In Argentina, Ecuador and Bolivia, a succession of neoliberal presidents were overthrown through popular uprisings. In both Argentina and Ecuador, which suffered deep economic crises 10 years ago as a result of IMF policies, governments defaulted on their debts.

In early 2007, newly elected Ecuadorian President Rafael Correa called for a renegotiation of Ecuador’s US$10.2 billion external debt, following the example of Argentina’s then President Nestor Kirchner. Correa declared that part of Ecuador’s external debt was illegitimate, because it was contracted by military regimes. In April 2007, denouncing the neoliberal “Washington Consensus”, Correa ordered the expulsion of the World Bank’s country manager and, in December 2008, declared the country in default, describing the debt as “immoral”.

Soon after Correa’s repudiation of Ecuador’s debt, closer trading relations were established with Venezuela. In June 2009, Correa brought Ecuador into the Bolivarian Alliance of the Americas (ALBA), a trading bloc that includes Venezuela, Cuba, Bolivia and Nicaragua. New trading partnerships, which provided access to subsidised Venezuelan oil, new technology and the assistance of Cuban doctors and teachers, have provided welcome relief to Ecuador’s impoverished majority.

Today in Europe, the conditions are developing for a continent-wide struggle against the austerity measures dictated by the IMF, the EU and the European Central Bank, known as the “troika”. The measures taken by capitalist governments across Europe, which in effect nationalise the debts to private banks and force working people to foot the bill, have done nothing to resolve the crisis. They only deepen the spiral of debt accumulation.

The occupations, strikes and mass protests so far are a taste of things to come. Capitalist governments, well aware that their policies will provoke more social upheaval, are responding with repression. Just as they fear the “contagion” of the debt crisis, they should fear the “contagion” of popular protest as working people resist a continent-wide assault on all of the gains of the last half century.

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