Why an Italian meltdown threatens the world economy

Photo: melingo wagamamaSince
the collapse of 2008 the authorities have committed trillions of
dollars to rescue the financial system, but to no avail. The bourgeoisie
avoided the collapse of the banks, but only at the cost of provoking
the bankruptcy and collapse of whole states. What happened in Iceland is
a warning of what awaits one country after another.

By such desperate means they succeeded in avoiding a slump on the
lines of 1929, but these panic measures did not resolve anything. On the
contrary, they have produced new and insoluble contradictions. They
have turned the black hole of the private financial system into a black
hole of public finance.

After the collapse of 2008, the bourgeois tried to console themselves
with talk of a recovery. But this is the weakest recovery in history.
There are no “green shoots”. The world economy has not recovered from
the slump, despite the vast sums of public money pumped into the economy
by governments. The European Commission has continually downgraded its
outlook for economic growth in the Eurozone, which has now come to a
virtual standstill. Stagnation, however, is only the most optimistic
variant. Everything now points to a new and even steeper fall than in
2007-8.

The panic, which is reflected in the wild gyrations of the stock
exchanges, has spread rapidly from Europe to America. It is a kind of
deadly contagion that has infected all the Eurozone’s big countries. The
constant turmoil on world markets show the nervousness of the
bourgeoisie, which at times borders on panic. They are like a
thermometer that measured the intensity of a fever. The bourgeois
economists stand around the bed of the patient and shake their heads,
but have no effective medicine to prescribe.

Over the past couple of years the markets have begun to distinguish
between the stronger euro zone economies – Germany and its satellites –
and the weaker economies like Greece, Ireland, Spain and Italy.
Increasingly, the latter are being charged punitive rates for money
borrowed from the money markets. The increased charges make the burden
of debt heavier and even harder to repay. So when a credit agency like
Moody’s lowers the credit status of a country, this action becomes a
self-fulfilling prophesy.

This poses a threat to the very existence of the euro zone. The
European Central Bank might be able to keep Greece afloat (although this
is extremely doubtful). It managed to stage a bailout for Ireland and
Portugal, which has solved nothing. But there is simply not enough money
in the ECB to bail out countries the size of Spain or Italy. Any
attempt to do so would soon exhaust the bank’s funds.

If you accept the market economy, you must accept the laws of the
market, which are very similar to the laws of the jungle. To accept
capitalism and then complain about its consequences is a futile
exercise. A vast amount of money is constantly moving around the world,
like a pack of hungry wolves following a pack of reindeer, seeking out
the weakest and sickest animals. And now there are plenty of sick
animals to choose from.

After dragging down Greece, Ireland, Portugal and Spain, the wolves
turned their attention to Italy, which has an enormous mountain of debt,
amounting to around 120 percent of the country’s gross domestic
product. This is the second highest level in the EU after Greece.
Moreover, Italy has €335bn of loans maturing over the next year, much
more than Greece, Ireland and Portugal put together. It will need to
borrow hundreds of billions and each time it asks for a loan, investors
around the world are likely to worry whether it will be repaid, given
its huge public debt.

Italy

The editorial of today’s Economist expresses the growing alarm of the bourgeoisie:

 “When the world’s third-largest bond market begins to
buckle, catastrophe looms. At stake is not just the Italian economy but
Spain, Portugal, Ireland, the euro, the European Union’s single market,
the global banking system, the world economy, and pretty much anything
else you can think of. Greece is important because it sets precedents
for the euro—over such things as debt write-downs and rescues. Italy
matters much more because it is so vast.”

The article continues:

“It is clear now that Italy will be the crucible which tests the euro
to destruction—or survival. Only a few weeks ago, that test still
seemed avoidable. Now it is at hand. If the euro zone wants its currency
to survive, it must stem the panic and make Italy’s vaudeville politics
credible. Both acts are still within Europe’s compass. But with each
lurch of the euro zone towards contagion, with each bungled change of
government, and with each reluctant intervention in the financial
markets, the task becomes harder and more costly. As the grim scene
unfolds, you can almost feel the euro’s chances draining away.”

26 October, Berlusconi speaking with Zapatero. Photo: European CouncilEconomists
have repeatedly stressed that "Italy isn’t Greece or Portugal," and
"Italy’s economic fundamentals aren’t that bad." That may be true, but
it will not convince the markets in their present state of nervousness.
The trigger for the market uncertainty was the instability of the
government in Rome. Doubts about the stability of the Rome government
and a deep scepticism about the country’s finances led to the fall of
Berlusconi. But a mere change of Prime Minister will do nothing to stop
the precipitous fall of Italy. The markets will demand deep cuts to
“prove that Italy is trustworthy.”

The Corriere della Sera appeals for calm: "It doesn’t help to get
excited about international speculators. If we conduct ourselves
seriously then we have nothing to fear. Unfortunately we have not been
serious up until now. For that, the markets are paying." The question
is: exactly how are Italians supposed to demonstrate their “seriousness”
to the markets? The answer is provided by Greece: only through massive
cuts in living standards. A vicious programme of cuts was passed today
by the Italian Senate, but this only succeeded in bringing down yields
slightly, to 6.88% – still an unsustainable level. The Italian
government remains in crisis, without a stable government and talks are
to recommence Saturday morning.

The markets are watching like hawks, expecting further deep and
painful cuts in public spending. The present mood of sullen acquiescence
will turn into fury. The scenes we have witnessed in Greece will be
replicated in Italy. Despite all the efforts of the leaders to avoid it,
an intensification of the class struggle in Italy is inevitable.

A new eurozone?

Every country in Europe will be drawn into the crisis. But they will
not all enter this process at same time. >Until recently, the German
capitalists were doing rather well, and this good fortune was shared
with its satellites: Austria, the Netherlands and Finland. But Germany’s
strength was based on its industrial muscle, which depends crucially on
exports to Europe, the growth of which is not under Germany’s control.
The strength of Germany is more apparent than real. The destiny of
German economy depends on what happens in the rest of Europe. If the
euro collapses, it would have a devastating effect on Germany.

Germany is expected to carry the whole of Europe on its back, but its
shoulders are too narrow to bear such a weight. Why did German
capitalists decide to pay debts of Greeks and Irish? Germany had lent
the money to Greece in boom. The Germans are attempting to prevent a
Greek default, not out of altruism, but in order to save the German
banks, and, they hope, stop the rot from spreading to other countries.
German banks hold €17 billion in Greek debt, but have €116 billion in
exposure to Italian debt.

Germany had to prop Greece up. They really had no choice because an
economic collapse in Greece would immediately signify a crisis of the
German and French banking system. Similarly, Germany cannot afford a
Spanish or Italian default. But neither can they afford to bail these
countries out. They have already failed to solve the Greek crisis by a
huge injection of cash. And there is simply not enough money in the
Bundesbank to underwrite the debts of Spain and Italy.

That is why the idea of “Eurobonds” is opposed by Germany, who would
have to foot the bill. It would require a new round of EU treaty
negotiations. This would be a most painful experience, which, far from
leading to a united Europe, would expose all the underlying
contradictions and frictions between the different nation states.
Instead of creating a united Europe, it could actually hasten the
breakup of the EU.

The realization is gradually dawning in Berlin that the rapid spread
of the economic crisis threatens to drag Germany down. There is
speculation about a restructuring of the Eurozone, with a smaller group
based on Germany. Merkel and Sarkozy deny this suggestion indignantly –
which means that it is probably true. The Economist comments:

“The truth is that the risks of the euro splintering really have
mounted. Angela Merkel, the German chancellor, and Nicolas Sarkozy, the
French president, acknowledged at the recent G20 summit for the first
time that they might abandon Greece to its fate—a devastating shift from
leaders who had always insisted that the euro would survive intact at
any price. There is chatter that they are contemplating a new club of
core euro countries that can live within the rules, and jettisoning the
rest. […] Such talk will make it harder for the ECB to convince
markets that the euro is here to stay”.

However, any attempt to set up a “German bloc” would have dramatic
consequences for the EU itself. Presumably, the intention is to drive
the weaker economies out of the Eurozone. But which countries are they?
The ejection of Greece has already been mentioned. This would be
followed – by whom? Ireland? Portugal? Spain? Italy? What about Belgium
and France? Belgium’s finances are not much healthier than Italy’s, and
the markets are already beginning to place a big question mark over the
French banks because of their high exposure to Greece. French 10 year
bond yields have risen to 3.46%, although partly as a result of S&Ps
“mistaken” downgrading of French bonds.

If all these countries are forced out, not much would be left of the
Eurozone. And it is doubtful if the EU itself could be maintained under
such circumstances. The resulting slump would affect the whole of
Europe, not excluding Germany and its satellites, whose exports are
mainly destined for the European market.

Paradoxically, the formation of a German-dominated “inner circle”
would not save German capitalism but rather would undermine it fatally.
Backed by the Bundesbank, and bolstered by tight fiscal discipline, the
“new euro” (the old Deutschmark under another name) would soar even as
other currencies collapsed. This would completely undermine Germany’s
exports – the key to her past economic success. This is what has
happened to the Swiss franc recently.

The deepening of the crisis will inevitably lead to the re-emergence
of protectionist tendencies, which will tend to undermine the tendency
towards freer trade that has been the main locomotive of the world
economy for decades. The breakdown of the euro would be a powerful
impetus towards protectionism. This is what is causing alarm in
bourgeois circles. The economists know that it was protectionism and
competitive devaluations that turned the 1929 Crash into the Great
Depression of the 1930s. And history has a very bad habit of repeating
itself.

Tobogganing towards disaster

Trotsky
wrote in 1938: “The capitalists are tobogganing towards disaster with
their eyes closed.” We need one change to that statement: The
capitalists are tobogganing towards disaster with their eyes wide open.”
They can see what’s happening. They can see what’s coming with the
Euro. In America they can see what’s coming with the deficit. But they
have no idea what to do about it.

We pointed out even before the euro was launched that it is
impossible to unify economies that are pulling in different directions.
Now some bourgeois economists are warning that the pressures and
tensions building up can lead to the collapse of the single currency.
For the first time, the question is openly being aired of the
possibility of the breakup, not just of the euro, but of the EU itself.
The crisis of the euro is an expression of the insoluble contradictions
of the European Unity.

The immediate catalyst of the crisis of the euro was the Greek crisis.  At
the onset of the Greek crisis, the bourgeois consoled themselves with
the idea that only the states on the edges of Europe were in trouble.
But the idea of what the markets regard as the risky periphery got
bigger and keeps expanding from one day to the next. European stock
markets experienced new and ever steeper falls. But all the talk about
erecting a “firewall” around Greece has been exposed as hollow.

The idea that you can isolate Greece—or any other country in the
Eurozone—is a foolish illusion. They are all tied together like men on a
mountain-climbing expedition tied together by a rope. When one man
falls, he will drag all the rest with him. The repercussions of the
Greek crisis go far further than Greece itself. It has led directly to
the crisis in Italy, which threatens the Euro and the European Union
itself.

The implications of a deep crisis in Italy will be felt worldwide.
The seriousness of the situation is difficult to overstate. Italy is not
Greece. It is one of the seven leading industrial nations (G-7) and the
euro zone’s third-largest economy. A crisis in Italy would have
devastating effects on the whole of Europe. Italy is said to be too big
to fail. But it is equally too big to save.

The Americans are increasingly worried about the crisis in Europe,
which they believe (correctly), can drag down the entire world economy.
The breakup of the Eurozone would set off an economic tsunami that would
send waves hurtling across the Atlantic, where they would rock a
financial setup that is anything but stable.

The US government currently runs a $1.5trillion budget deficit,
requiring it to issue debt in the form of treasury bills, bonds and
other securities. The public debt was $14.3tn on 31 May, up from $10.6tn
when Mr Obama took office in January 2009. Most is held by the public,
with the rest held in US government accounts.

Let us remember that the U.S. itself came close to defaulting on its
$13.4 trillion public debt in June of this year. The crisis caused an
open split between the Republicans and Democrats. Until recently nobody
mentioned the huge debts of the USA. But now that has changed, since the
rating agency Moody’s said it was considering cutting the US AAA debt
rating, citing the rising possibility that the US could default on its
debt obligations.

Hardly a day passes when Obama does not put pressure on the Europeans
to “do something” to solve the crisis. He accuses the Eurozone of
dragging the rest of the world into crisis again, conveniently
overlooking the small matter of the huge US fiscal crisis and the
inability of the Republicans and Democrats to agree on a serious plan
for reducing the huge budget deficit.

The Americans are desperately calling on Germany to “do more” to pull
Europe out of crisis. The Germans must cut taxes; they must boost the
economy; they must send more money to Greece; they must lead a
coordinated fiscal stimulus across northern Europe. Germany must do this
and Germany must do that. But who are the Americans to tell the Germans
what to do?

Yes, say the Europeans, but who pays for all this? To this question
there can only be one answer: France and Germany, or more correctly,
Germany, which is Europe’s banker of last resort. Those who have talked
big about a Marshall Plan for Greece are now politely requested to put
their money where their mouths are. But nobody is prepared to put their
hands in their pockets. For Merkel to agree to underwrite the debts of
the Italians and Spanish would be political suicide. And she is just as
reluctant to do this as are the Democratic and Republican politicians on
the other side of the Atlantic.

Even in Germany there is not enough money to bail out all these
countries. Britain and France has been putting pressure on the Germans
to remove all restrictions on the European Central Bank, effectively
asking them to do their own “quantitative easing”. As Richard McGuire,
strategist at the Dutch Rabobank (supposedly one of the safest banks in
the world), put it: “The ECB has to choose whether to crank up the
printing presses or risk a much messier outcome, raising the prospect of
default amongst the key players.”

To resort to “quantitative easing” (that is, to print money) would be
a desperate measure. It would ultimately end in an explosion of
inflation, leading to an even deeper slump in the future. In short, none
of the measures of the bourgeoisie can avert disaster. Even the EFSF
deal which was to save Greece (never mind Italy) has not yet been
completed. The EFSF has been forced to cancel its bond auctions. The
Economist draws the most pessimistic conclusions:

“Nothing can now prevent a debt crisis in Italy. Borrowing costs are
set to remain well above their levels before the crisis. The finance
industry will not soon reverse its extra margin call and even if it did,
investors are not about to treat Italian debt as “risk free”. Ratings
agencies will surely downgrade the country. If its debt is left to
spiral down, Italy will be shut out of the bond markets. Its banks will
become vulnerable, as their depositors and lenders conclude that they
and the Italian state are likely to become insolvent. Contagion will
spread across the euro zone. The end will come soon enough.”

London, 11/11/2011