By Henry CK Liu
At the close of an emergency Sunday meeting of financial ministers from the 27-member European Union (EU) that lasted until the early hours of Monday, May 10, 2010, the exhausted attendees emerged to announce a startling nearly 750 billion euro (US$1 trillion) financial stabilization package for EU member states with sovereign debt problems and the European Monetary Union (EMU) to restore market confidence in the euro, its common currency for the 16-country eurozone.
Immediately after foreign exchange markets opened several hours later on the same day, the dramatic news caused the euro to soar against the dollar and the yen, reversing its recent sharp decline as fallout from the sovereign debt crisis in Greece.
Unfortunately, the trillion dollar package seems to be a total failure. The relief from downward market pressure on the euro was short-lived, confirming the market's continuing apprehension about the heavy and worsening sovereign debts burden facing all EMU member economies and possibly beyond and across the Atlantic.
The crisis in trade
The eurozone buys around 15% of US exports. Reflecting the global economic slowdown, the EU bought $221 billion from the US in 2009, down from $244 billion in 2007. The US trade deficit with the EU fell sharply from $110 billion in 2007 to $60.5 billion in 2009.
A sharp fall of the euro against the dollar in 2010 accompanied by fiscal austerity in eurozone economies will adversely impact the US economy by making US exports more expensive in a market of falling demand, while investment and tourism from the eurozone will moderate. This may reverse the recent downward trend of the US trade deficit with the EU.
The eurozone is now China's largest trade partner, surpassing the US. Europe's imports from China grew by around 18% per year for the previous five years from 2009. This trend will accelerate further if the euro falls. Two decades ago, China-Europe trade was negligible. In 2008, the EU imported goods worth 248 billion euros from China, which is now Europe's biggest source of manufactured imports and also Europe's fastest growing export market.
Europe exported 78.4 billion euro worth of goods to China in 2008, a rise of 9% compared with 2007 and a growth of 65% between 2004 and 2008. Europe runs a surplus on trade in services with China - 5.7 billion euros in 2008, up from 3.9 billion euros a year earlier. Yet this is about 30 times smaller than its trade deficit for goods, which was 169 billion euros in 2008.
EU-China trade decreased in 2009 due to the global economic downturn. European imports from China went down, while EU exports to China have remained largely stable. This trend can be expected to accelerate as the EU deals with its sovereign debt crisis in its member states with austerity measures.
A slowdown of the eurozone economies will further adversely impact China's export sector, which has already been hit by severe recession in the US. A falling euro will also present problems to the Chinese central bank in its recent efforts to diversify its huge foreign reserves away from the dollar.
The crisis in exchange rates
The euro jumped to a high of $1.3048 on the day the EU stabilization package was announced. European policymakers prematurely breathed a sigh of relief that their "shock and awe" package had helped to shore up market confidence in the common currency.
However, by Thursday, May 13, two trading days later, the euro had fallen back near its 14-month low at US$1.2586, down 0.3% on the day, putting it within a cent of where it had been just before word of the bold stabilization move hit the market. It traded at $1.1960 on Friday, June 4, almost 11 cents below the $1.3048 level traded immediately after the stabilization package was announced on May 11.
The crisis in government
The failure of trillion dollar stabilization package is more than financial. The package helped ease concerns over the prospect of a wave of imminent sovereign debt defaults within the 16-country eurozone, but currency traders were aware that the underlying problem had not been solved. Even with a gargantuan stabilization fund, there was no hint on how the highly indebted eurozone member states would get their public finances back on track going forward to meet European Monetary Union (EMU) requirements without triggering political crises from popular opposition to fiscal austerity.
A major concern was the problem of deep popular discontent with pending government austerity measures that would be required to lower excessively high public debt levels and chronic fiscal deficits. In particular, there were worries in the market that the recently installed socialist government in Greece would not be able to push through the draconian measures it had been forced to accept in order to secure the earlier 110 billion euro rescue pact scheduled over three years. This was because of the fear that resultant political resistance and social unrest would topple the socialist Greek government under Prime Minister George A Papandreou that had been elected on a platform of increased prosperity only seven months earlier on October 6, 2009.
Market participants are cognizant of the fact that this sovereign debt crisis is not an isolated local problem in a small country, but a eurozone-wide financial virus that broke out first in Greece but could detonate explosive crises in other similarly infested national economies around the globe with serious economic and political implications.
Already, Germany's conservative coalition government, led by the Christian Democrat Union (CDU) has been weakened as the CDU suffered an important regional election defeat over its inept handling of the sovereign debt crisis in Greece. German voters also fully expect that Germany will have to face its own fiscal austerity measures soon as a result. Other eurozone member states are not expected to be exempted from similar popular discontent against incumbents in government in this regional sovereign debt crisis.
Even in the UK, which has been a member of the EU since1973 but is not a eurozone member state - although it conducts large trade with the eurozone - the Labour Party lost control of the government after a general election produced no majority winners. Failing to form a new coalition government with the Liberal Democrats, Labour had to hand over the reins of government to a Conservative coalition supported by the Liberal Democrats.
Voter hostility towards center-left incumbency over painful economic austerity issues is now rampant in the multiparty democracies.
A panic demand for fiscal austerity
The sovereign debt crisis in Greece has sparked a panic wave of radical policy demands for fiscal discipline throughout the European Union from a perverse coalition of neo-liberal public finance ideologues and anti-government conservatives. Proponents of fiscal discipline argue that the EMU and its common currency, the euro, will not be sustainable without the drastic restructuring of public finance in all eurozone member states through a combination of tax increases and deficit reduction through fiscal austerity. But creditors, mostly transnational bank, will be protected from having to accept "haircuts" on their holdings of sovereign debt.
Yet such harsh approaches of tight fiscal austerity at a time when the global recession of 2008 is still waiting in vain for a recovery will risk increasing the danger of a double dip recession in 2011 in a secular bear market. The alarmist voices of these fiscal deficit hawks clamor for fiscal austerity programs that are essentially punitive for eurozone workers; at the same time, they continue to tolerate abusive financial market manipulation that will benefit only the financial elite as the economic pain is passed on to the general public.
Fiscal deficits across the eurozone are to be reduced by cutting public sector wages, social benefits and subsidy expenditures so that transnational bank creditors will be paid in full while a blind eye is turned to blatant tax evasion and avoidance by the rich with non-wage income, which contributes to loss of government revenue and fiscal deficits.
The dysfunctional disparity of income and polarization of wealth between the wage-earning masses and the financial elite with income from profit and capital gain are the main causes of overcapacity in the economy. In past decades, the neo-liberal response to overcapacity was to shy away from the obvious solution of raising wages, turning instead to flooding the economy with huge mountains of consumer and corporate debt that eventually resulted in a tsunami of borrower defaults that turned into a global credit crisis. Repeating the same response to the current crisis will lead only to another global crisis down the road.
While the culprits of the global credit meltdown of 2008 have been bailed out with the public's future tax money, the sovereign debt crisis across the globe is blamed on innocent wage earners for receiving supposedly unsustainably high wages and excessive social benefits that allegedly threaten the competitiveness of economies in a globalized trade regime designed to push wages down everywhere.
Sovereign debt crisis not caused by the welfare state
The rush by the rich and powerful to punish the trouble-causing working poor goes against strong evidence that the current sovereign debt crisis is not caused by high social welfare expenditure; rather, it is caused by a sudden drop in government revenue due to economic recession, which in turn is caused by a credit market failure under fraudulent accounting that is allowed in structured finance and for which the financial elite are directly and exclusively responsible.
The sole special purpose of is to treat proceeds from debt issuance as revenue from sales to remove financial liability from government balance sheets to present a deceptively robust picture of public finance. Through these devious "special purpose vehicles", phantom profits are siphoned off from the general economy into the pockets of greed-infested financiers while pushing the real economy out of balance, resulting in high real public debts that inadequate aggregate worker income cannot possibly sustain.
Despite propagandist distortion, the sovereign debt problem has not been caused by the high cost of a welfare state; it has been caused by deregulated financial markets that allowed governments to borrow huge sums against future revenue from public sector enterprises without showing the liabilities on government balance sheets.
Structured finance was providing participating governments with up-front cash while hiding the sovereign debts that had to be paid back in the future. But the bulk of the borrowed money went to the pockets of dealmakers of public sector privatization, while the debts were left with society at large. Large amounts of the national wealth are transferred from the local economy to international speculators through legalized manipulation that is made possible by deregulated financial market globalization. It is a new form of synthetic financial imperialism against weak economies through a scheme of naked shorts against the currencies and equities of vulnerable nations.
Fiscal austerity will endanger the EU
Further, such punitive fiscal austerity solutions will render the EU unsustainable as a political superstructure due to violent popular opposition in the constituent nations. Third Way centrist synthesis of free-market capitalism with the social democratic welfare state has provided the enabling conditions for the current sovereign debt crisis. Market fundamentalism has been exposed by unhappy but predictable events it helped to create as an exorbitant and spectacular failure. And the exorbitant cost of this spectacular failure of market fundamentalism will be put on the back of the innocent working poor.
There are strong signs that voters in countries with multiparty democratic political systems have been brainwashed into believing that free-market capitalism with minimum government intervention is the only road to prosperity. Voters have been conditioned unwittingly to buy into an anti-government ideology that diametrically contradicts the public's other demand for generous safety nets of socioeconomic security that only governments can provide.
When the gullable weak are convinced by the devious strong in society that government is the problem, not the solution, the weak are inadvertently trapped into a political climate that permits the destruction of their only institutional protector, since the existential function of government, regardless of political and economic color, is to protect the weak from the strong.
Government non-interference through deregulation and privatization of the public sector leads to the law of the jungle in free markets under which the economic function of the financially weak is to serve as the food supply for the financially strong. Historically, government evolves in civilization so that the weak masses can collectively resist the oppression of the strong elite. This is the reason why the strong in society always bash popular government.
Price of saving the euro may be EU dissolution
Thus the attempt to save the euro from collapsing in exchange value under the weight of aggregate eurozone member state sovereign debts through coordinated fiscal austerity in all member states of differing socio-economic legacy and conditions will incur the price of political divergence of the member states from the European Union.
Member state governments are pulled apart from the union by centrifugal nationalist forces generated by separate and divergent domestic politics. Popular sentiment against local fiscal austerity for the sake of preserving the European Union is spreading like wild fire in the EU's sovereign debt crisis.
But a weakening of convergence toward full integration of European nation states will prolong the euro's structural vulnerability as a common currency without a unified political structure and condemn it to remain a multi-state currency with high political risk. This internal contradiction is the Achilles' heel of the euro, which is the legal tender of a monetary union without a political union.
Stormy political weather has recently battered incumbent centrist political leaders in several countries by holding each of them separately responsible for the austerity measures they are now forced to implement to get their different economies out of unsustainable sovereign debt.
In order to meet a 2013 deadline for compliance with EMU's euro convergence criteria as spelled out in its Stability and Growth Pact (SGP), the ratio of the annual government fiscal deficit to gross domestic product (GDP) at the end of the preceding fiscal year must not exceed 3% and the ratio of gross government debt to GDP must not exceed 60%. This means the eurozone governments need to slash their individual budget deficits to add up to a total of 400 billion euros. This huge sum will be taken primarily from the pockets of public service employees, pensioners, the unemployed and the indigent in the EU for decades to come.
The so-called "debt brake", anchored in the German federal constitution, imposes a reduction in new debt of 60 billion euros by 2016. Among the many measures under discussion are cuts in social programs, such as family, child, welfare and disability benefits, annuities and pensions.
Delaying retirement age counterproductive
The EU Commission suggests that the retirement age in Europe should continue to rise steadily. This is to ensure that in future, no more than a third of a person's adult life could be spent in retirement. In the long term, this would mean raising the pension age to age 70. This will add pressure on young new entrants to the job market for the next two decades as fewer positions will be vacated by retirement of the currently employed.
For millions of workers and young graduates, the newly adopted measures mean rising unemployment and poverty levels. At the other end of the working life, old-age poverty will again become a mass phenomenon in Europe. Nothing will remain of the post-war welfare state.
A study by the Carnegie Endowment for International Peace think tank in the US concludes that "the welfare states set up across Europe from the 1940s onwards with the aim of suppressing popular unrest and paying off tensions that could lead to another continental war" are "unaffordable". What was left unsaid in the study was that it would be unaffordable only if the disparity of income and polarization of wealth were to be allowed to continue. In an overcapacity economy, the people can afford what they produce if the system does not deprive the majority of their right to the wealth they create and hands it to a controlling minority. Revolution would have to come by policy or it will come by violence.
In a fiat money regime, it is the central bank's responsibility to ensure an adequate supply of money. The fiscal budget shortfalls that are being used to justify the dismantling of the welfare state are the result of the systematic mal-distribution of income and wealth from those at the bottom of society who do the work to those at the top who do the manipulation.
For a quarter of a century since the late 1970s, both right-wing and center-left governments have reduced taxes on income and property for the rich, depressed wages through structural unemployment as a tool to fight inflation and have abdicated government responsibility in maintaining economic justice.
The concept of a living wage is regarded by new coalition as utopian. Wages are set by their marginal utility to the return on capital in unregulated markets rather than by the economic law of demand management in a modern overcapacity economy of business cycles, the recessionary phase of which has become nearly continuous. Popular discontent is muted with unsustainable increases of the public debt. These are the main causes of the sovereign debt crisis, not over-consumption by the working poor.
Public debt has been pushed up sharply in the past two years by the trillions of dollars that governments, run by free-market policymakers, pumped into distressed banks to prevent their collapse from proprietary speculation in deregulated markets. Recent figures from the German Bundesbank showed that in 2008 and 2009, some 53% of Germany's new public debt was used to rescue distressed financial institutions. The total new public debt rose by 183 billion euros in those two years; the costs involved in supporting distressed financial institutions amounted to 98 billion euros.
Trade union leaders as hatchet men of neo-liberalism
To push through the austerity measures against the working poor, the ruling financial elite drafted the social democrats and the trade unions as their hatchet men. In the PIIGS (Portugal, Italy, Ireland Greece and Spain) countries, social-democrat-run governments impose the austerity measures, or, as in Britain, France and Germany, the social democrats have so discredited themselves by their previous cost-cutting measures that now the right-wing parties have reaped the political benefit. In all cases, the social democrats leave no doubt that they support the cuts, telling working people that there is "no alternative".
Trade union leaders have been willingly subscribing to the discredited "TINA" (There Is No Alternative) voodoo economics of Ronald Reagan and Margaret Thatcher, in cooperation with corporate-controlled governments to wage financial war on labor. The labor-organized demonstrations and strikes against austerity measures have all been suppressed by armed police, with the violence and deaths exploited as reasons why labor protects must cease.
Yet labor has a moral and functional obligation to force structural changes in the dysfunctional economic system, instead of continuing to remain a passive victim in the new age of wholesale anti-labor selfdom.
Meanwhile, in the United States, a conservative populist movement that calls itself TEA (Tax Enough Already) Party is gaining popular support and can easily be transformed into a fascist political force. Left unsaid in TEA Party rhetoric, besides protest against rising taxes, is protest on the prospect that the tax money should be spent on the poor, rather than bailing out the errant financial elite. Until labor takes the rein of reform, the EU's trillion-dollar stabilization package will end in failure.
Part 1: The crisis of wealth destruction
Part 2: Banks in crisis: 1929 and 2007
Part 3: The Fed's no-exit strategy
Part 4: Fed's double-edged rescue
Part 5: Too big to save
Part 6: Public debt - prudence and folly
Part 7: Global sovereign debt crisis
Part 8: Greek tragedy
Part 9: Greek crisis, German politics