Through cuts to more cuts... and default?

Submitted by martin on 16 November, 2010 - 2:11 Author: Martin Thomas
Euro

As of the end of October, Ireland's banks held about a quarter of the "liquidity" (short-term cash loans, against "collateral" of financial paper) issued by the European Central Bank for the whole continent.

Ireland's total short-term cash drawings had risen from 89.5 billion euros at the end of July to 130 billion by the end of October.

Those figures lie behind the flurry in mid-November, when the European Central Bank formally called on the Irish government to get a further long-term loan from the EU's European Financial Stability Fund, or from the IMF. As I write, the Irish government is still stalling.

Portugal, Greece, Spain, and Italy, in that order, are queued up behind Ireland to appear on the "acute financial crisis" stage.

All have big budget deficits. All have to sell lots of bonds (government IOUs) in 2011, if only to pay off previous bonds (IOUs). All have to offer high interest rates (or, what comes to almost the same thing, accept lower prices) to sell their bonds (Ireland, Portugal, and Greece much more so than Spain and Italy).

Their governments' current plans are that by making huge social cuts, they will reduce their costs, set a basis for gradually reducing their debt burden, and so see the crisis through.

It might even work, in capitalist terms, if they could increase income from exports at the same time as they make the social cuts. In fact, with demand stagnant almost everywhere, the social cuts are bringing with them a general slump in production and thus a slump in the income which might pay off the debts.

The German government is worried that German banks, which have lent billions to the high-debt countries, will end up having to accept reduced, delayed, or cancelled repayments on their loans. Thus it organised the EU "bail-out" in mid 2010.

But at the same time it is pushing hard, and successfully, for a concerted and sharply neo-liberal economic policy across the EU to "tidy up" the crisis. It wants to impose financial discipline on the eurozone's big borrowers, and to keep up the value of the euro in world markets.

In some ways, a decline of the euro relative to other currencies can help rather than hinder German capital. It makes German exports outside the eurozone cheaper.

But there are disadvantages. And German governments and bankers also have a deeply-ingrained bias towards prioritising the stability of the currency, rooted in old histories of hyper-inflation in their country.

Between 1950 and 1995, the value of 10 deutschmarks in dollars went up from $2.40 to $7.02, while the value of the pound went down from $4.03 to $1.60, and the value of the French franc and the Italian lira went down even more.

The European Central Bank, unlike for example the Federal Reserve in the USA, has been legally mandated to keep the euro stable, at a low inflation rate, above all else.

The trouble is, the "deflationary" bias which the EU is imposing on the high-debt countries blocks the way for them to generate more income and pay down their debts. Usually, a high-debt country would see its currency's exchange rate sink (thus increasing its exports and decreasing its imports) and its central bank able to limit slump by issuing new credit. The eurozone's high debt countries do not have those options.

So far, the May 2010 bail-out has failed to bring any sort of stability. Many mainstream economists see no prospect other than some of the high-debt countries defaulting (saying they can't make payments due, and negotiating deals to pay more slowly, or less) and some countries leaving the eurozone, or even the eurozone breaking up completely. (That would not necessarily, or even probably, mean the EU breaking up).

Socialists can neither defend the eurozone and its rules, nor endorse individual countries' exits into individual export-oriented austerity plans as the alternative. Our argument must be for Europe-wide public ownership and democratic control of the big banks and financial institutions, financial policy geared to social goals, and social levelling-up across the EU. But for now the high-debt countries are headed through cuts to more cuts and then default.

The dilemmas of the eurozone may be a fact behind the recent startling call by World Bank president Robert Zoellick for gold to be restored as "a reference point of market expectations" in world currency transactions. The bigger background fact is the USA's difficulties with managing the dollar's exchange rate with China's renminbi (the USA wants the renminbi's relative value to be allowed to rise faster; the Chinese government, which keeps all exchange transactions under government control, refuses), and the general dilemma of the US dollar serving both as "world money" and as "US money".

For centuries until the 1930s, major states regulated their currencies by a gold or silver standard: for example, for a long time the British pound was set at a value of 0.284 ounces of gold.

A sort of gold standard was restored after 1945, but it was in effect a dollar standard, since the USA held 60% of the whole world's central-bank gold reserves (in 1948). In 1971 that modified gold standard was abandoned, and since then the dollar has been world money, with other currencies' exchange rates against it being set each day by the markets.

With the USA's economic hegemony looking more shaky, capitalists worldwide are looking for another form of world money. But gold?

In conditions of:

  • capitalists having realised that constant mild inflation, rather than stable prices, are best for their system;
  • relatively rapid economic expansion (long-term and on a world scale);
  • a physical supply of gold tiny compared to the needs of commerce, and not easily expanded;
  • no prospect of large new expansions of gold-mining, as in Australia and California mid-19th century, and South Africa late 19th century; a gold price, therefore, very heavily influenced by speculative movements rather than fundamentals of production -

in all those conditions, a gold standard makes no sense. It would be violently unstable and deflationary.

That had been pretty much accepted by mainstream economists. Brad deLong, a liberal US economist, comments that Zoellick "really may be the stupidest man alive".

Other economists have recalled John Maynard Keynes's proposal after World War Two for a transnational "world money", to be called the bancor and issued by the IMF.

The USA was probably in a position to carry out Keynes's scheme, but nixed it. A feeble shadow of the bancor, IMF SDRs, was created in 1969, but has never played much role. It is hard to see how anything like the bancor can be created in today's conditions of capitalist ferment and instability. Thus wild cards like Zoellick's proposal.

The world is set to continue under the conditions described by Marx: "A depreciation of credit-money... would unsettle all existing relations. Therefore, the value of commodities is sacrificed for the purpose of safeguarding the fantastic and independent existence of this value in money... For a few millions in money, many millions in commodities must be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties".

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