EU leaders delude themselves

Driven to the brink of mental breakdown by the rapidly deepening crisis, European leaders last night agreed on an attempt at self-delusional trickery.

The “voluntary” agreement by banks to take a 50% cut in the money they’re owed by the Greek government – a default in all but name - is a green light to a frenzy of profitable, intense activity by hedge funds.

They will gamble on the likelihood that banks will or will not act on the agreement or, instead, cash in on their Greek debt insurance policies, known as credit default swaps.

A desperately inadequate bail-out package, it is no more likely to be successful than the previous one hammered out only four months ago. That one ran into the sands of slowing economic growth turning into accelerating global contraction.

The new one, also calculated on the false promise of a recovery, relies on an undefined method for turning €250 billion of the remainder of the €440 billion financial stability fund left after handouts to by Ireland, Portugal and Greece into €1 trillion.

It is called “leverage”, but neither of the two methods on offer can deliver what’s needed.

The first, which offers “insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market” is no more than a delaying tactic intended to draw more suckers into the black hole of global debt.

The second, “a special purpose investment vehicle aimed at attracting investment from China and Brazil” is nowhere near agreement. The best that could be said is that “it will be set up in the coming weeks”. Fat chance.

Europe’s sovereign debt crisis is a reflection at state level of the now toxic debt mountain that drove globalisation. Last night’s deal only reaches the margins of the problem and will deepen the recession.

Europe in the eye of the storm

With Europe firmly at the epicentre of a new stage of the global financial crisis, the heads of government meeting in Brussels today is hoping for the best but undoubtedly preparing for the worst. As events spiral out of control, there are warnings of dire political consequences from predicted social unrest as governments slash and burn spending on public services and jobs.

The European Union itself is now under severe strain as an economic and political entity. Inter-bank lending is virtually frozen and the single currency severely weakened since the financial meltdown in Greece and the emergency intervention of the Intenational Monetary Fund.

Spain, in particular, is in dire trouble and we’re not talking about the country’s shock defeat by the Swiss at the World Cup. Unemployment is already a catastrophic 20% - twice that level among young people – and the Socialist Party government’s cuts programme has provoked plans for a General Strike.

As the crisis moves from banks to nation states, Spain is being talked about as the Lehman Brothers of the 2010 crash,. Many foreign banks are holding Spanish government debt that is no longer worth what it was bought for. With their own balance sheets looking decidedly unhealthy, the banks are on strike. Francisco Gonzalez, chairman of the BBVA financial services group, admitted: "Financial markets have withdrawn their confidence in our country. For most Spanish companies and entities, international capital markets are closed."

The comparison with Lehman Brothers is as serious as it can get. Lehman’s collapse in the autumn of 2008 plunged the world economy into recession. A collapse of the Spanish economy would usher in a deep, unparalleled slump. In the United States, top fund manager John Hussman, in his latest weekly market commentary, believes that the country is already in recession. Spain going belly up and asking for €250 billion to shore up its finances could prove the last straw.

The is what made billionaire philanthropist and investor George Soros issue a stark warning of how the deepening economic and financial crisis will strain political systems come to their limits. He told a conference: "If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period.” This was a hardly disguised reference to the rise of Nazi Germany in the wake of the Wall Street crash and the onset of the Great Depression.

Soros is concerned that he “fiscal discipline” – cutting budget deficits – is a big policy mistake and that the thing to do is to maintain public spending along the lines advocated by John Maynard Keynes in the 1930s. That presupposes that a) this will lift capitalist economies out of recession and b) governments are free to adopt this course.

A year or so of central banks in America and Europe printing money à la Keynes in a bid to “restore growth” has failed. This is because the economic crisis is a combination of over-producton and mountains of debt which have wrecked the financial system and not one of under-consumption. In fact, much of the new money printed simply leaked out of national economies into global financial markets.

Of course, Soros is right in that cutting budget deficit will only worsen the crisis, leading to higher unemployment and severely reduced living standards. But with capitalist governments competing with each other for decreasing amounts of available credit, there is little choice in the matter. Spain and Greece have put the frighteners on the Clegg-Cameron coalition and tightening the regulation of the financial system is a little like bolting the stable door after the horse has fled.

The threat of dictatorship raised by Soros is not outlandish. Any idea that day-to-day politics is possible as this crisis unfolds should be put to one side, along with notions that the budget cuts can be thwarted with protest and pressure alone. Revolutionary economic and political solutions along the lines suggested in our Manifesto are more to the point.

Paul Feldman

Communications editor