A New Stage in the Crisis of Capitalism – Part Two

In the second part of his article, Alan
Woods looks at the dire economic situation the European Union faces. He
also analyses the effects of the European crisis on the world economy.

The European Union

During the Cold War European capitalists attempted to form a bloc to
defend themselves, on the one hand, against the might of the USSR, on
the other hand, against the encroaching power of the USA. The collapse
of the USSR and the achievement of a unified Germany in 1989 gave a
further impetus to European economic integration. The German bourgeoisie
and its political representative Kohl, had big ambitions. The euro was
in large part an attempt by Berlin to achieve by economic means what
Hitler attempted to do by force – to unify Europe under German
domination.

Drawing by LatuffThe
euro zone has a single central bank, the European Central Bank (ECB),
and therefore has only one monetary policy, regardless of whether it is
located in Athens or Berlin. But in reality, the whole project was
dominated by German capital. Initially, Germany benefited from free
access to other European markets, and the others benefited from access
to seemingly unlimited supplies of capital, investment, loans, grants
and credits. Everything seemed to be for the best in the best of all
capitalist worlds.

In order to convince Berlin to share its currency with the rest of
Europe, it was agreed that the euro zone should be modeled after the
Bundesbank. The Euro itself was to be as strong as the deutschmark. As a
condition for joining the euro zone, every country had to agree to
rigorous “convergence criteria”. These were intended to synchronize the
economy of the member states with that of Germany.

These criteria included a budget deficit of less than 3 percent of
gross domestic product. Government debt levels were to be no more than
60 percent of GDP. An annual inflation could be no higher than 1.5
percentage points above the average of the lowest three members’ annual
inflation. Now all these plans lie in ruins. As we predicted more than
ten years ago, it is impossible to achieve convergence criteria for
economies that are moving in different directions. Greece’s failure to
comply with the Growth and Stability Pact is only the most blatant case.
But the truth is that from the very beginning none of the euro zone
member states — including France and Germany — have complied with the
rules.

Now deep cracks have opened up which threaten to bring down the whole
artificial construction and bury all the dreams of a united capitalist
Europe. Sarkozy at one point threatened to pull out of the single
currency if Germany didn’t agree to pay up.

Big banks in France and Germany would be devastated if there was
default in Greece or Portugal, since they have lent most of the money.

Will the euro zone break up?

The trouble with the euro is that it attempts to unite economies that
are pulling in different directions. The European bourgeois are
striving with all their might to keep the currency union together. They
are acting on the old thieves’ saying: either we hang together or we
will hang separately. But the crisis has revealed the underlying fault
lines that threaten to break the euro zone apart and even pose a
question mark over the future of the European Union itself. The tensions
are increasing all the time.

When the euro was born a decade ago, it came with central rules
limiting budget deficits and banning bail-outs. Yet the rules, which
theoretically included huge fines for excessive borrowing, were never
likely to stick, and were soon emasculated by France and Germany. The
financial markets assumed that no euro-area country would ever be
allowed to go bust: they assumed that the European Central Bank would
always come to the rescue. Now, despite the latest bailout, this can no
longer be taken for granted.

This time, Germany has agreed to back a “rescue fund”. But there are
profound tensions in Germany. If the crisis deepens and the national
tensions increase, it could possibly cause Germany to quit the euro zone
altogether. The idea is rapidly gathering ground in Germany that Greece
and the euro zone’s other weaker economies should be excluded from the
currency union if they do not pay their debts. At one point it seemed
that Chancellor Merkel herself was in favour of this.

It is therefore not at all ruled out that the present crisis will end
with the “reconstitution” of the Euro zone, either by the expulsion of
Greece or the withdrawal of Germany. But the latter variant would mean
in effect, the total breakup of the experiment. It would plunge world
currency markets into a deep crisis and wreck the weak economic revival.

If Greece were to withdraw from the euro, its central bank could
print money and purchase government debt, bypassing the credit markets.
It would also allow Athens to devalue, which would stimulate external
demand for Greek exports and spur economic growth. The alternative is to
resort to a painful “internal devaluation” via austerity measures
demanded by the International Monetary Fund (IMF) and the EU.

The problem is that no one would want this new currency, particularly
because it would be clear to everyone that the government would only be
reintroducing it to devalue it. In effect, the drachma would only be
accepted within Greece, and even there it would not be accepted
everywhere. It would lead immediately to a black market, which would
have to be put down by force. The cost of exit would therefore be
prohibitively high.

How can the present crisis be resolved? In theory, the expulsion of
member states is illegal. In any case, it would have to be approved by
of all 27 member states, which poses the intriguing question: why should
Greece approve its own expulsion? Even if it could be arranged, it is
clear that Portugal, Spain and Ireland would not be very keen to vote
for a measure that would provide a precedent for their own exclusion in
the not-too-distant future.

Of course, there are very clever people sitting in Brussels whose
creative powers can surely enable them to think of some bureaucratic
solution that would bend the rules to allow the European Union to get
rid of undesirable members without formally breaking the treaties. They
could, for instance, set up a new European Union with a new “strong”
euro zone, minus Greece (and any other awkward customers).

Such a step would eliminate one problem, but only at the cost of
creating many new contradictions. Germany would greatly increase its
power, and that is not something the rest of Europe would be
enthusiastic about. In a new euro zone composed of, say, France and the
Benelux countries, Germany’s economy would represent 45.6 percent of
overall output, as opposed to 26.8 percent of euro zone now. Moreover,
the excluded states might take their revenge by defaulting on their
debts, which would have a devastating effect on the new euro zone.

Parasitism of capitalists

The bourgeois has long ago lost all interest in productive activity
and productive investment. It seeks to make money out of money without
having to bother with the painful and risky process of production. With a
few exceptions, like China, where huge profits can be made from the
exploitation of a vast pool of labour from the countryside, the
bourgeoisie has tended to rely more and more on the parasitic service
sector, and especially the financial sector. That is why they always
present the crisis as a crisis of credit.

This is an entirely mystical way of presenting the question. Credit
can never play an independent role in the economy. Credit is only a way
of expanding consumption beyond its natural limits, either individual
consumption of commodities, or the consumption of machinery, raw
materials and labour power by the capitalists themselves.

The purely parasitic nature of modern capitalism is seen by the fact
that when the banks ran up huge debts, the state immediately stepped in
to shower them with vast amounts of public money. The bankers said
“thank you very much” and then proceeded to pocket the money, or pour it
into a black hole (nobody knows how deep it is or where it leads),
helping themselves to generous bonuses in the process.

There is no sign of all this massive injection of public funds into
the banks having any serious effect on the real economy. Economic life
remains at a very low level and unemployment remains stubbornly high.
There is very little real gain to be shown for such a huge expenditure
of public money. The reason is not hard to explain. Given the huge
amount of excess capacity on a world scale, there is little or no
incentive for the capitalists to spend large sums of money on productive
investment. There is one third excess capacity in the car industry on a
world scale. Why should Ford and General Motors build new plants, when
they already have too many factories and not enough paying customers?

“The banks must be saved!” That is all. The politicians immediately
come running with an open cheque book. And the Social Democrat
politicians run faster than anybody else. Having “saved the banks” (that
is, having saved the bankers), the politicians then sadly inform a
bewildered public that, well, actually, we never had the money to pay
the bankers in the first place. We had to borrow it in your name and now
you must pay it all back. Time for sacrifice!

Once the banks have pocketed the money of the state, the markets
(that is to say, the same bankers) suddenly begin to shout: “Look! There
is an unsustainable level of public debt! This must be paid
immediately!” In the midst of this unholy hullabaloo, nobody asks the
simple question: Why is there a high level of public debt? And nobody
asks where all the money has gone to. Here we enter the mysterious realm
of banking secrets, which must be maintained as absolutely as
the secrets of the confession box in church.

What is the “credit crunch”?

As long as the world capitalist economy was going forward, markets
were booming, profits were soaring, credit was easy. Nobody looked too
closely at the balance sheets of companies, banks or nations. Everybody
was enjoying the merry carnival of money making. The values on the stock
exchange are soaring to heights that bear no relation to the real
economy? Let them soar! The banks are lending money they do not have?
Let them lend! Greece wants to borrow a billion or two? Let them have
it!

But when the day of reckoning comes (as it always does) the mood of
the bourgeois changes abruptly. Now nobody wants to lend money. On the
contrary, they are all calling in their debts. Instead of the former
cheerful open-handedness, there is a mean and grasping mentality, like
that of a miser who greedily hoards his loot and guards it jealously so
that nobody will see how much he has got. Hoarding is a typical feature
of primitive capitalism in its early stages. In a crisis, it is as if
the bourgeois have returned to their beginnings, like a man in the stage
of decrepit senility who returns to a second childhood.

Now nobody wants promissory notes. They do not want promises of any
kind, because they no longer trust anybody: creditors, bankers or
governments. They want the real thing. They want cash in hand. And they
want it now. This meanness takes no account of the real problems faced
by families, businesses or governments. You do not have enough food to
eat? Then starve, but pay me what you owe. Your business will have to
close, and hundreds will lose their employment? Then close it, and be
damned, but pay up! And if this absolute rule of Capital is appropriate
in the case of individuals and businesses, why should a nation state be
any different? It is the business of Capital to make money. Whatever
problems may arise from this money-making activity is an irrelevant
matter.

Marx describes this tendency to hoard money in a crisis:

“Countries in which the bourgeois form of production is developed to a
certain extent, limit the hoards concentrated in the strong rooms of
the banks to the minimum required for the proper performance of their
peculiar functions. Whenever these hoards are strikingly above their
average level, it is, with some exceptions, an indication of stagnation
in the circulation of commodities, of an interruption in the even flow
of their metamorphoses.” (Capital, vol. 1, Section 3, Money, c)
Universal Money)

The role of gold

Paper money is only a promise to pay. In the past it was backed by
gold and silver. But in the age of the senile decay of capitalism the
bourgeois imagined that it could do without gold altogether. The
bourgeois economists talked of the “demonetization of gold”. This is
complete nonsense. Gold is a commodity, and like all other commodities,
has an objective value, determined by the amount of socially necessary
labour power expended on its production. Its value as a commodity is
high because it is relatively rare and there are high costs involved in
its discovery and exploitation.

However, gold has historically evolved as “the commodity of
commodities” – that commodity through which all other commodities
express their values, that is, money. It is a standard of price,
and also serves as a universal measure of value, the
equivalent commodity par excellence, to use Marx’s expression.

The Bretton Woods agreement of 1944, which set up the international
monetary regime that prevailed from the end of World War II until the
early 1970s, established the dollar as the medium of world trade (with
the pound sterling as a secondary currency). In reality, however,
currencies were still pegged to gold at a value fixed in dollar terms.

At that time the USA could dictate terms to the rest of the world.
After the War, the productive apparatus of the USA was intact, while
Europe and Japan were devastated. Two thirds of all the gold stocks in
the world were in Fort Knox. The dollar was therefore “as good as gold”.

When the United States abandoned the gold standard in 1971,
Washington liquidated the Bretton Woods agreement that pegged currency
to gold. Currencies were allowed to float. While the U.S. dollar was
still regarded as the world currency, the deutschmark began to emerge as
a strong contender for this role.

The paper currencies in use throughout the world today are no longer
backed by gold. Therefore they hold no value except the political
decision to make them the legal tender of commercial activity. Refusal
to accept paper currency is, within limitations, punishable by law. But
this means governments must be willing and able to enforce the currency
as a legal form of debt settlement. But what happens if a government has
such a high level of debt that it is unable to meet its liabilities?

By abandoning the link to gold, the bourgeoisie created the
conditions for the kind of currency competition and beggar-my-neighbour
devaluations that was one of the main factors that transformed the
crisis of 1929 into the Great Depression of the 1930s. In the last few
years the US authorities were content to see the dollar slide against
the euro and other currencies in order to boost its exports to the rest
of the world.

Some of the more obtuse politicians actually believed the nonsense of
the bourgeois economists about the “demonetization of gold”. Thus,
Gordon Brown sold off Britain’s substantial gold reserves between 1999
and 2002, and in the process obtained a mere $4bn for what today would
be worth more than $15bn. This little detail reveals at once the
intellectual bankruptcy of bourgeois political economists and reformist
politicians, which, in this case, contributed directly to national
bankruptcy.

The flight into gold

As the credit ratings of Greece, Spain and Portugal fall, so the
world market price of gold is soaring far more than most other
commodities. This always happens in a crisis, when the capitalists look
for a safe harbour to shelter from the storm. In uncertain times, the
financial gamblers of yesterday suddenly lose their taste for risky
operations. The hard-headed men of money are no longer interested in
paper money, or promises of any sort, whether from private individuals,
bankers or Greek Prime Ministers. They want only the real thing: cash in
hand, ready money – real money, that is, gold.

Let the academics, the professors of economics with long lists of
letters after their name, deliver lectures on the demonetization of
gold. Those who really hold our economic destinies in the palm of their
hand, are unimpressed by such lectures, which only confirm them in their
instinctive belief that the most ignorant people in society are to be
found between the four walls of universities. Instead, they repeat the
words of Shakespeare in Timon of Athens:

The bourgeois are anxious to get their hands on gold, hoping its
glitter will defy the laws of economics and maintain their fortunes
until the dawn of better times. Indeed. Long before the crisis of 2007
many financial speculators were already getting rid of paper money and
building up their stock of bullion. As soon as that happened, savvy
shoppers followed. The big-time investors, as always, led the way, and
are now being followed by everyone else, pushing the price of gold to
astronomic levels.

Refineries in South Africa say they are overwhelmed by orders from
Germany for Krugerrand gold coins. This indicates that ordinary people
are buying gold, not just professional investors. In Germany memories of
hyper-inflation in the 1930s still survive. The Austrian mint says it
ran out of its stock of similar coins last week, as the price of an
ounce of gold passed through the €1,000 barrier for the first time.

The “speculators” (read, capitalists) do not have any faith in the
euro, and still less in the pound sterling. The dollar has risen
recently, but this is a sign of desperation and the weakness of
alternative currencies. It is certainly not justified by the strength of
the US economy or the state of its finances. Under these conditions one
would expect to see a flight from paper money into gold and other
things that may hold or increase their value (works of art). And that is
just what we are seeing.

Germany

The European bourgeois are looking to the future with dread. They
must tread carefully, because they are walking on a minefield. With
every step they take, the bourgeoisie and its political representatives
must constantly look over their shoulders to see how the working class
is reacting. That is the main problem. After decades of relative
prosperity, the working class will not allow their living standards to
be destroyed without a fight. And that is just as true of the German
workers as it is in Greece.

Merkel paid the price on May 9^th, when she suffered her
worst political defeat in more than five years in office. The very
evening when European finance ministers were meeting in Brussels to
defend the stability of the euro, voters in North Rhine-Westphalia
(NRW), Germany’s most populous state, ejected the chancellor’s allies
from office. Voters unseated a coalition between her Christian
Democratic Union (CDU) and the liberal Free Democratic Party (FDP)
similar to the one in Berlin.

Merkel was not to blame for the euro crisis but when it came she
delayed taking measures. On the one hand she wanted to exert extra
pressure on Greece, but also Spain, Italy and Portugal to introduce
draconian austerity packages. On the other she was hoping that bail-outs
of Greece and other weak euro-zone members could be put off until after
NRW’s election. But the delay only made matters worse. The defeat in
NRW has deprived the Merkel government of its majority in the Bundesrat,
the upper house of the legislature, which represents the states. To
enact most money bills the government will now have to co-operate with
the opposition.

The economic crisis is causing divisions at the top that sooner or
later must lead to an open split in the government. The pressure will
mount. Everyone is in favour of deficit reduction in principle but
in practice it is another matter. Merkel now presents herself
as the guardian of economic stability. But who will decide where the axe
will fall? Some suggest cuts to education and child care. Health-care
is another candidate for “reform” – that is, the axe. The crisis of the
bourgeoisie is shown in the contradictory advice given to Merkel: “Be
bold”, she is told, “but do not offend the voters”. How this miracle is
to be accomplished we are not informed.

The bourgeoisie faces a dilemma, not just in Germany but in all
Europe. The seriousness of the economic crisis means that they will have
to inflict deep cuts on the workers and the middle class, but the
social and political consequences of such actions will completely
undermine them. To solve this dilemma is only slightly more difficult
than trying to square the circle. Every attempt to restore the
economic equilibrium will destroy the social and political equilibrium.

The German bourgeoisie is resentful of bail-outs, fearful about the
euro’s stability and increasingly unwilling to identify Germany’s
interests with those of Europe. This is a far cry from the grandiloquent
speeches of Kohl about European unity and Germany’s role at the centre
of it.

World economy

The looming crisis looks very similar to the last, with the financial
system, and banks in particular, at the centre. This fact reflects the
fundamental sickness of capitalism in the epoch of its senile decay.
What now being presented as a monetary crisis will become a
prolonged economic and political crisis affecting every country in
Europe.

The U.S. capitalists were hoping that they could dramatically
increase exports to Europe. But the steep drop in the value of the euro
(about $1.25, down from more than $1.50 in November 2009) makes American
goods more expensive compared with those produced in Europe. The
American economy will be hard hit by a new banking crisis and a fall in
exports to Europe. It would be harder to borrow money or raise finance
for businesses.

In a crisis the banks stop lending to each other and begin closing
down credit lines, sparking a chain reaction throughout the financial
system. The banking systems in Europe and the United States are closely
interconnected and European banks must have serious repercussions in the
USA.

Daniel Tarullo, a member of the Federal Reserve’s board, recently
warned that a repeat of the 2008 crisis which saw the near collapse of
the US financial sector was "not out of the question." He told Congress
last week that banks were going through spasms that "brought back
memories of developments during the recent global financial crisis." The
decline in the common European currency also makers it less likely that
China will accept with U.S. demands to raise the value of their money,
making it easier for U.S. products to compete.

To be continued