• Europe in the Great Crisis

  • By Joachim Bischoff | 09 Nov 10 | Posted under: Contemporary Capitalism , Theory
  • For years the EU-Commission has been complaining about society in the Euro-zone being divided into two classes. The gap between those Euro-states able successfully to compete, with Germany as the market leader, on the one hand, and, on the other hand, those countries with high deficits, in southern Europe in particular, has indeed widened in recent years. If the member states drifted even further apart, the union as a whole would be in danger of falling to pieces. Germany’s aggressive export strategy is even further impoverishing the weaker Euro-countries.

    Thus there is increasing danger that the emergency parachute of 750 billion Euros established by the EU and the IMF will be claimed. In a paradoxical way, their booming economy could turn out to be costly for German citizens, because as the largest national economy Germany is standing surety with a lion’s share.

    While Spain, Greece and Ireland are indeed drastically cutting back their state budgets, the cuts will in Germany turn out to be clearly less far-reaching than government rhetoric might suggest. Even according to the original plans Germany has not embarked on an exorbitantly strict course of consolidation.

    Due to its strong export orientation, the German economy can be expected to catch up temporarily. By dedicating public means on a global scale to stimulate the boom and by maintaining the prevailing low-interest policy the shrinking process of the global economy could be stopped. In particular, some of the countries on the periphery of the global capitalist system – India, China, South Korea and Brazil – could avoid the slump through their adoption of strong economic stimulus plans and even enhance their positive economic development. German export industry was positively affected by this boom thanks to its strong capacity to compete in the price sector.

    The opposite must be said about the domestic economy: Neither in Germany nor in Europe is it the motor of economic recovery. Not only is Germany the European export champion, it is also the European champion when it comes to wage restraint. In the past ten years, gross wages and salaries have nowhere in the European Union (EU) risen as slowly as in Germany. Compared to the year 2000, they increased by merely 21.8% to the first quarter of 2010, while in the entire EU wages increased by 35.5% in the same period.

    Even the neoliberal president of the EU-Commission, Barroso, could not avoid coming to the conclusion, “As one lesson from the crisis we have learned that the stark contrasts in the capacity to compete must be levelled and that the social market economy has to be modernised. Europe must show that it represents more than 27 different national solutions. Either we swim together or we go down separately.”

    Despite its strong growth the German economy has only made up for 60% of the losses of the economic slump which was caused by the financial crisis. Most prognoses assume a tendency towards economic slowdown also for Germany. This is due to the fact that the process of recovery depends on the storage cycle and the reduction of an investment jam. Many storage facilities are empty now and have to be filled up again. Part of the postponed renewal of fixed capital is also prompting growth. On the other hand, there is, in the entire global market, a trend towards flat growth rates.

    In Europe, further recovery stands and falls with the course of development in the USA and in the aspiring threshold countries, most of all China. And for these countries the early indicators have for some time now been pointing downwards, which means that it will not be possible to maintain the speed at which the global market has been expanding so far.

    The idea that, due to its export orientation, Germany will be able to stay outside this trend is naïve. The growth of the Chinese economy has already slowed down, which means that the demand from China too is on the decline. The worsening development in the USA will have consequences for the German boom. Since, at the same time, domestic demand remains weakened due to the development of wages and salaries and the massive austerity policy, a decrease of growth in the months to come will be the most probable variety of development.

    The USA and the challenge of deflation

    For months now, unemployment in the USA has remained constant at a high level, and also with regard to first-time job applications there is no easing of tension. Experts consider this to be a sign that the situation of the labour market remains difficult. Thus the chances for a boom in the world’s biggest national economy are vanishing, with 70% of this economy’s development depending on private consumption. The economic crisis has cost the jobs of more than 8 million Americans. Experts fear that it will be years before this number of jobs can be created again.

    Thus the development in the USA differs strongly from that in Germany and the EU. According to the FED, economic recovery has “slowed down in recent months”. In the face of the low key interest rate it can rely only on unconventional methods to stimulate the economic cycle. Just as at the beginning of the crisis, it now wants to buy state bonds from the US Treasury. To do so it wants to use money from its huge packet of bonds secured by real-estate assets, which it has acquired in its struggle against the financial crisis and which amount to a volume of 1.25 billion US Dollars. This announcement by the FED can also be understood as a signal that there will be no more recourse to exit strategies from the liberal monetary policy, as had been discussed only a few weeks ago.

    Obviously, the US is still in a structural crisis. Mass unemployment, low economic growth as well as high budget deficits and pressing public debts will presumably be the characteristic features of the US economy in the years to come. Many private households, but also enterprises and public institutions, are still paying off the debts which were accumulated in the period of the “irrational abundance“ of the financial markets. This holds particularly true for the real-estate sector. After the expiration of relief measures, such as tax relief for house buyers, the weakness of this market segment is becoming particularly obvious. There is now the threat of pressure on prices again. Fannie Mae and Freddie Mac are holding up the sector at present. Both enterprises are buying or guaranteeing 90% of the mortgages that are currently being provided. Altogether, the market for mortgages subsidised by the government comprises 5,000 billion US Dollars.

    In terms of the current trend of development, US experts are quite afraid of a transition to a deflationary process: We are closer than ever before in recent history to a permanent crisis, as in Japan. Therefore a deflation-fighting tendency is prevailing in the FED. The politics of the central bank and the government is no longer to focus on possible risks of inflation, which hardly exist anyway, but instead on the potential danger of the economy drifting into a phase in which both wages and prices are falling. Since the prime rates are only a little above zero and thus a further reduction of interests is inconceivable, there has been discussion for some time now of pumping additional means into the economy via the pension market.

    The central challenge remains the structural condition of the US economy. However one is to view the status of a super power whose liquidity depends on China assiduously continuing to buy its debt titles, it is still clear that in the USA a deindustrialisation process has been going on for years. Relatively unsophisticated branches of production are wandering off to Asia, with hardly any substitutes replacing the losses – and all this despite the technological power of the USA. Incomes are stagnating, the middle classes are Thinning out and unemployment is increasing. That is the real problem the political class would have to tackle.

    The USA is losing its industrial basis, and the attempt to compensate, through the financial industries, for lost profit opportunities led to the 2007/2008 crash. The solution probably lies in a new surge of investment, on the one hand into the infrastructure, on the other into environmental technology. The recent measures of the Obama Administration – a programme of boosting infrastructure and of tax reductions for medium-sized enterprises – point in the right direction but will be far too underfunded.

    In the ranks of US economists, a majority is sceptical in the face of the current trends. Nobel Prize laureate Paul Krugman is shocking the elite with the thesis that the US is entering a third phase of the Great Depression. “The economy is still in the sphere of attraction of the Great Recession.” And former US Labor Secretary Robert Reich emphasises, “All rockets to take us out of there are failing just now”. In the US the hope for a boom is now receding. Worries about the economy are growing. In the second quarter, GNP was growing by just 1.6%, with the unemployment rate amounting to an historic high of 9.6%.

    The upswing in Japan has stalled

    In Asia, the upswing in Japan is coming to a halt. The growth of the world’s second largest national economy has clearly decreased in the second quarter. Compared to the first quarter, the real GDP has increased by a mere 0.1% between April and June. Thus, the country has the weakest growth rate among the world’s six leading economic powers. Experts had predicted a plus of 2.3% after the Japanese economy had grown by 4.4% in the first quarter as compared to the same period the year before.

    Causes for the slump in growth in Japan are a decline in the export stimulus but also a continuing weakness of consumption at home. As compared to the first quarter of 2010, public investments have fallen in the past three months by 3.4%, while expenditures of private households were stagnating. Investments by enterprises only rose slightly by 0.5%.

    It is expected that the continuing high of the Yen as compared to the US Dollar and the Euro might be an obstacle to economic recovery in Japan also in the second half of the year. Exports will remain solid due to the dynamic boom in Asia, but as a consequence of the revaluation of the Yen the growth rates will not continue, which in turn hampers the companies’ expectations of profit and sales.

    At first sight, the current picture of the Japanese financial world appears absurd. On the one hand, the country is highly indebted, while, on the other, investors are taking refuge in the Yen and buying Japanese state bonds to an extent which caused the interest rate for ten-year-bonds to fall below 1%.

    With their fervour for saving, the Japanese population has amassed 1,400,000 billion Yens in savings. In this respect they are the world champions, although it should be pointed out that the Japanese have lost the title to the Chinese when it comes to the saving quota. Enterprises are not lagging behind citizens in this respect; neither can the state be accused of sluggishness when it comes to saving. Former Prime Minister Koizumi had already drastically pruned back public building projects, and local governments reduced the salaries of their officials. The new government of Democrats is deploying live publicly broadcast forums on saving, with the aim of axing the various ministries’ prestige projects. Despite all this, the government wants to freeze the budget in 2011 and the new indebtedness only to the present level, and only by 2015 reduce the budget deficit, which is currently 9% of the GNP, by half.

    It is certain that a political majority in favour of a harsher austerity course could be found. However saving alone would not help. Japan must increase the tax revenues which decreased by 37% between 1990 and 2009. The value-added tax, for example, amounts to 5% and has not been increased since 1998, despite the explosion of the mountain of debt and expenses for social security.

    In the beginning of autumn 2011, the Bank of Japan is leaving the key interest rate at the very low level of 0.1%, while at the same time expanding the credit facility by 10 trillion Yen (140 billion Euros). Business banks are able to supply this sum within an expiration date of six months, again by depositing papers, and in addition to the already available 20 billion Yen (12 million Euros). At the same time, the government has declared its readiness to prolong expiring relief measures at the level of 920 billion Yen (13 billion Euros). This involves subsidies for ecological building projects, cheaper loans for smaller and medium-sized enterprises and benefits for university graduates searching for a job. Together with the fiscal political stimulus, if such a stimulus can be detected at all, the economy receives an impulse of less than 0.1% of GNP.

    This deflationary pressure can be observed in all industrialised countries. The recent crises affecting the real-estate, banking and currency sectors all have one origin: an excessively high indebtedness. This deflationary pressure remains and is slowing down the economic cycle.

    What can be done against this? The private sector has to reduce its debts, and both the government and central bank have to stick to the policy of stimulating the economic cycle. This will take some more years and nobody can tell what the outcome will be. In that period a systemic crash like that of the 1930s is not realistic, at least not for Japan; instead, an economic rollercoaster ride can be expected, that is, a deviation from the normal economic cycle. In the deflation phase, Japan has had to write off about three times the value of its GNP with the crash of assets such as bonds and real estate. In the US, the losses were only equal to the GNP and in Europe the losses vary from country to country. Germany, for example, has got off relatively lightly.

    In the near future we will not witness a destruction of values in any of the capitalist centres as high as that of Japan, but we see that the process will follow a similar course, that is, no transition to a self-supporting boom or a prosperity configuration. The deflationary development will dominate and so will an economic rollercoaster ride and a slowly deepening social divide.

    To say it even more clearly: At present, Europe and the US are closer to a deflation in the style of the one Japan underwent with economic stagnation and sinking prices. It is blindingly obvious that most classical symptoms of a deflation are already observable in the US: continuous reduction of the high indebtedness in the private sector, a hesitant demand on the part of the consumers who are confronted with losses of values, low capacity utilisation by the enterprises, loans by the banks only supplied to blue-chip debtors stagnating amount of money in circulation despite massive stimulation. The picture is completed by wage cuts in the public service sector but also in the private sector in the USA and the endeavours in Europe to reduce state debt.


    Under the weight of the stagnation in the USA and the ongoing calamities on the labour market, the US Federal Reserve Bank is postponing an exit from its anti-crisis-policy. For 18 months now, the FED funds rate has practically been zero. Temporarily, a crisis can be softened by fiscal policy, i.e. by the note-issuing bank providing liquidity and trying to incite investment activities with low interest rates. Yet, if this only has a marginal effect, note-issuing banks and the political institutions would have to resort to more offensive means of fighting the crisis. Also the European Central Bank and the Japanese note-issuing bank have postponed exiting from their anti-crisis policies. By an expansive note-issuing bank policy it is indeed possible to forestall the melting of the core of the international financial system and the slipping of the real economy into a steep downward spiral, but the indispensible correction of over-capacities and of accumulated loans has not taken place.

    It will be years before the imbalances in the relations of distribution and in the global economic structures are corrected. Against this background, it is naïve to announce a sustainable upswing for the German economy. Rather, the speed of growth will slow down and the extent of growth will be determined by global economic-developmental tendencies. A decoupling of the German economy from the development in other capitalist metropolises is rather improbable, considering the actually existing weaknesses of the domestic economy.

    Both the FED and the ECB have pumped hundreds of billions in liquidity into the markets. Nearly every western government has tried to boost their economies through economic stimulus programmes. In the US, both fiscal and monetary stimulus policies have gone up in smoke. Through them it was indeed possible to avoid total disaster, but sustainable growth has not set in either. We are now seeing a kind of helplessness on the part of note-issuing banks. The FED has expanded its total assets by 1,500 billion US Dollars while keeping the key interests at almost zero. Still, the unemployment rate remains at a level of almost 20% if the unofficially unemployed are also counted.

    The core of the problem is that the flows of financial capital are misdirected: the business banks are bunkering money instead of lending it out: since October 2008 they have increased their money reserves from almost zero to about 1,000 billion US Dollars. Households are made insecure and as a consequence have increased their savings quota from zero to almost 6%. Enterprises hesitate to invest, because all in all there is too much insecurity in the entire system.

    FED Chair Bernanke has clearly stated that the note-issuing banks alone cannot set things right. Too much is expected of the note-issuing banks. Bernanke knows that he must do everything to save the USA from a Japanese-style lost decade.

    The US Federal Reserve has taken high risks to enforce the boom. The total assets of the note-issuing bank amount to 2,300 billion US Dollars, which is three times as much as in the year 2008. Almost half of the money is tied to mortgage-secured bonds which were at the core of the financial crisis because of their high risks. Thus the FED has insecurities and risks in its hands amounting to billions. Despite this the growth rate has decreased to 1.6% in the second quarter.

    At least in Europe and taking the strength of the German economy into account, an effective step against a chronically deflationary downward spiral would be a change of direction in distribution policy, in particular regarding wages and salaries. As early as 2003, Heiner Flassbeck was right when he said, “Why is deflation such a dangerous illness? Standard answer: Fiscal policy does not have any effects on deflation, because it is not possible to reduce the interests to below zero. Everyone is talking about even the limited possibilities of fiscal policies to stimulate a boom because private consumers are being very cautious… Deflation is always the consequence of the attempt to live below one’s means. Since the relative costs are decreasing the enterprises have to reduce prices … Deflation is dangerous, because it is the logical consequence of the reigning abstinence tendencies in society. Everybody is warning against inflation, but only a few warn against deflation. Those who want to prevent Japanese conditions or even a depression kindled by deflation such as that of 1929 and the years following, must keep their hands off the costs of labour. Those who want to reduce the non-wage benefit costs must increase wages accordingly, to prevent the well-intentioned reduction of costs turning into a bad deflation.” (Financial Times Deutschland, 23, June 2003).

    Although the impressive recovery of the economic cycle of recent months seems to suggest other conclusions, the big crisis of the 21st century has not yet been overcome. Due to the value loss of loans having been stopped by means of public loans and due to the renewed and aggravated increase of debts in the USA and in Europe we are threatened by massive deflation in the years to come – and not the inflation normally depicted. In many enterprises there continues to be a great need for depreciation.

    A combination of low interest levels, deregulated credit standards, the development of exotic financial instruments and the formation of a global market for structured bonds has led to the development of a massive credit and asset bubble. After the real-estate and mortgage bubbles had burst, the result was a chain reaction with the prices for houses falling sharply, which in turn plunged the economy into a deep recession. Since in some countries consumption has in recent decades contributed to as much as 80% of growth rates, investments and state expenditures must take over a bigger share of economic activities. If this is possibleat all, it would only be after the devaluation of capital claims and the clearance of over-capacities.

    The basic problem is that as a consequence of a speculative movement too many debts have been accumulated. Brokers bought assets expecting to be able to sell them at higher prices later and the ability to do so required ever more loans. This mechanism was central to the US economy, that is, the money was not earned by the production of goods but by speculation with further price increases. We have to understand that we are still stuck in the midst of the biggest finance bubble of all times, which was stabilised by socialising the losses. The cause of this development is a financial sector that to a great extent is out of control.

    As soon as the policy of low interests and of boom-creating impulses expires, the temporarily interrupted process of debt write-off will lead to a shrinking economy, in particular in countries like the US, which are characterised by a high ratio of debts to GDP. Even if the national stimulation strategies were to be prolonged or renewed they will hardly suffice to outbalance the depressive effect. Thus a development similar to Japan’s is looming and it will take some time before the recognition fully penetrates public opinion and politics that the recipes currently applied are not effective. Only then can the problems and imbalances created in the last 20 years be tackled.

    Our political problem: In his inauguration speech, Franklin D. Roosevelt declared in 1933, that is, four years after the outbreak of the great depression, “The loan-givers determined the religion and as the only solution to the debt crisis propose still more debts.” In their approach to the problem, today’s political class has not advanced beyond the solutions Roosevelt criticised.

    And because they have not made any progress on this question, the danger is looming of a rise of right-wing populist movements and parties, with their frontal attack on the political system and the political class and with their racist strategies of exclusion of immigrants and welfare recipients, which tries to appeal to corresponding resentment among broad segments of the population, while in the background the struggles for fairer distribution and against the massive precarisation of wage labour are intensifying.

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