To regular readers of this blog, it will sound like a tiresome cliché by now, but the fact that capitalism never solves its own crises was driven home once more last week by the outcome of the much-anticipated European Union crisis summit in Brussels on Wednesday. Yet again, European leaders managed to stave off an immediate catastrophe by buying themselves some extra time. But, yet again, the fundamental problems remain unresolved.
Here’s a list of points that European heads of state agreed upon:
- Private creditors will “forgive” 50 percent of Greece’s sovereign debt.
- European banks will be recapitalized to the tune of 109bn euros.
- The European Financial Stability Facility (EFSF) will be ramped up to 1 trillion euros.
And here’s a list of reasons why this is nothing but hot air:
- The write-down of Greek debt is voluntary. It therefore remains to be seen whether foreign lenders will actually agree to take the 50 percent haircut. If enough private creditors actually refuse to accept the ‘voluntary’ write-down, the plan will formally constitute a hard default, triggering the feared Credit Default Swaps that could unleash another “Lehman’s moment”. Besides, Greece has long since ceased to be the problem. Its $400 billion debt was child’s play compared to the $2 trillion that Italy still owes.
- Bank recapitalization will backfire. Europe wants its banks to hold a 9 percent capital-to-equity ratio by 2013, but will not inject any capital itself. Since inter-bank lending is already precarious, raising additional capital on private markets will be a costly endeavor for the banks. As “rational” actors, they will therefore have an incentive to shrink their assets (i.e., lend less money), as opposed to raising more capital. This will further aggravate the credit squeeze, which is a retarded thing to do in a context of pro-cyclical austerity measures. The banks know this and will use the argument to hold the EU hostage to their own agenda. It’s an embrace of death.
- The enlargement of the EFSF rests upon two shaky assumptions: (1) that the large creditor nations underwriting the fund will retain their triple-A rating; (2) that the fund succeeds in raising hundreds of billions of euros in investments from emerging economies like China, Brazil and Saudi Arabia. The first point is critical because France, the second biggest contributor to the fund, is mired in its own sovereign debt and banking crisis and will probably lose its triple-A rating soon, throwing the EFSF into disarray. The second point is problematic because potential foreign creditors like China understandably remain skeptical about the fund’s profitability.
These problems will surface sooner rather than later. Don’t be surprised if EU leaders are called back to Brussels within a few weeks or months to hammer out yet another temporary solution… and so on, and so on… until the edifice finally crumbles and the eurozone’s inevitable demise finally becomes a reality. There’s nothing more frustrating than watching this endless cycle of stupidity unfold. Sometimes it’s just more dignified to face death rather than fight it.
So here’s what we believe should be done:
- For starters, the EU should immediately impose capital controls to stem the outflow of hot money, kicking speculators in the nuts and greatly diminishing the risk of financial contagion and future speculative bubbles. A Robin Hood tax on long-term financial transactions should be imposed with immediate effect to pay for the anti-social and counter-productive austerity measures currently being imposed on the people.
- Greece should default on all of its foreign debt, leave the eurozone and nationalize its banks (which won’t survive a large default). This will trigger a run on Portugal, Ireland, Italy and possibly Spain as well, forcing a series of defaults and the break-up of the eurozone, unleashing a major financial crisis in Europe’s crazily over-leveraged banking system. But at least these countries will then be able to to devalue and print their own currency, ramp up public investments, boost employment and avert a social disaster.
- The countries of the core should allow their banks to fail (underwriting deposits up to a certain amount to make sure the average citizen is not affected), perhaps nationalizing the banks that are considered “too big to fail”, restructuring them into small, cooperatively-owned credit unions. The European Central Bank should pursue an expansionary monetary policy to make up for the credit squeeze induced by private bank failures. Germany and the Netherlands will oppose this. Screw them. Time to move South.
- The previous two arrangements will render the EFSF largely irrelevant. But European nations will now be stuck with even higher sovereign debt levels as a result of the bank nationalizations and collapse of tax receipts induced by the inevitable collapse in output that will follow the break-up of the eurozone. Sorry for all of you de-growthers out there, but for now, the only way out of overwhelming debt and mass unemployment remains through growth. Public investment facilities will need to be set up to boost employment and fund the transition towards a sustainable economy.
Whatever we do, we have to make sure this crisis doesn’t further embolden the bankers. Indeed, the crisis must be used to break the bankers’ backs and sever their stranglehold over our economy. Once that is done, we can finally start considering how to build an alternative model of democracy that truly reflects the will of the people, returning power to the masses and ensuring a future based on social justice, cooperation and sustainability. It’s just an idea, you know.