CRISIS IN EUROPE


A severe financial crisis is threatening Europe. It gets worse by the day. As an indication of how deep the crisis has become, Moody’s Corporation, a world recognized credit rating company, downgraded five German banks on June 6, hitherto regarded as having triple A rating. It has been predicted by financial experts that unless the crisis is resolved in a few weeks the Euro will unravel, financial chaos will ensue and the recession affecting only some countries will spread over Europe and further afield.

There has been little or no discussion in our media or that of the Caribbean on the crisis or its potential impact on our economies. Not only do we have trading relationships with Europe on which many industries rely, but we receive significant inflows in aid and grants from the European Union which can be adversely affected by an escalation of the crisis.

The causes of the crisis are not uniform and differ from country to country. They are complex and multi-faceted and, even so, there are disagreements among economists as to the origins and source of the problems Europe wide and also from country to country. But two immediate reasons are beyond doubt. There is a sovereign debt crisis and a banking crisis and they are interlinked. For example, it is the bail out of the bank in Ireland by the Government which depleted Government coffers which in turn required a bailout of the Government by the financial institutions. In Greece it was both sovereign and banking debt that triggered the crisis. The UK Conservative Government voluntarily imposed austerity measures when no visible crisis was threatening to deal with the sovereign debt issue. These countries are all now in recession.

Some of the debts of some banks have been written of, as in Greece, and substantial loans have been given to the Government by financial institutions in return for stringent austerity measures against which the electorate is now rebelling. In Spain, however, the EU is refusing to bail out one Spanish bank from a 23 billion Euro debt which is due shortly. A default by this bank will send tremors all over Europe. A rejection by the Greek electorate by the election of the Left on June 15 will transform these tremors into an earthquake because the Left has vowed to reject the austerity package. This is expected to result in Greece leaving the Euro which will cause a collapse of the Euro currency and lead to great financial and economic turmoil in Europe.

The European Union is in the grip of a debate, while time is running out, on how to deal with these. Germany, which is key to the solution being the most powerful economy in Europe, has this week made some proposals. These include more aid to alleviate the problems of countries and banks from a resourced European financial institution in return for greater EU control over banks and budgetary and fiscal policies of member countries of the EU. On the issue of austerity Germany has not budged and this is exactly the problem.

In the US, Great Britain and Europe, the crisis is being dealt with in two ways – bailout of the banks and austerity on the people. From the Occupy Movement in the US, to the protests in Greece, to the growing number of professional and other voices, previously suffocated, but now being heard, austerity is being exposed as the exact opposite to what is needed. Of course, in heavily indebted, a dose of austerity would be needed to curb to curb spending that does not impact on economic growth, employment and social benefits and should be mixed with an adequate dose of stimulus.

The US economy is stalling after a too modest amount of stimulus the impact of which has now been exhausted, repeating a problem experienced in the depression when Roosevelt voluntarily eased the stimulus too early only to have growth return with the surge in spending at the beginning of the War. Obama is being obstructed for political expediency by a Republican dominated Congress.

In the UK the sensible posture of the Labour Government of halving the deficit in five years by an austerity package leaving stimulus measures in place, was replaced by the ideologically driven Conservative plan to trash Government spending while granting tax concessions to the rich, all in aid of reducing the size of Government. This is a favourite conservative position which disguises the removal of hard won benefits to the people. Reduced Government spending means reduced health and welfare programmes.

While recession has overtaken several European countries and is threatening more, the Argentine experience is looming large especially for those countries which have the courage to take bold steps. Hopefully Greece will.

During the 1990s Argentina faced a sovereign debt crisis because it could not pay the banks. Two Presidents imposed austerity measures but popular rebellion forced them out of office. The late Nestor Kirschner was elected on a bold plan to default, restore Government spending and stabilize the economy by measures to control the flight of capital. In two years the economy began to grow again, people ceased going to bed hungry and the middle class was restored to financial security. Not a single banker went to bed hungry unlike the millions who had been forced to do so during the austerity. Today Argentina is growing at 8 percent.

The argument that is raging in North America and Europe about solutions to the crisis is rooted more in ideology than in economic science. The former favours austerity which results, as explained above, in more for the rich and less for all others. The latter dictates measured austerity and stimulus packages which repairs the economy while protecting jobs and the people’s benefits.

Let us hope that the peoples’ voices will put a stop to conservative governments resolving periodic capitalist crises by reducing burdens and removing benefits which they have earned after generations of struggle.

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