To best gauge the stability of the Eurozone today, an appropriate way to start is to reassess how the Eurozone responded to their last crisis.
In 2012 the European Sovereign Debt Crisis peaked, and European Central Bank chief Mario Draghi resorted to the same tactics as Mike Ditka, the legendary American football coach for the Chicago Bears.
But both promised to do: “Whatever it takes”.
Ditka made his promise during the 1990 season and, like Draghi, he made it from a position of relative weakness:
The 1986 championship (universally considered to be the most dominant American football team of all-time) was long gone, and Ditka’s aging team was at the end of their string. But he promised to do “Whatever it takes” to return to the playoffs that year, and thousands of T-shirts were dutifully printed up for the die-hard fans of “da Bears”. That 1990 team did make the playoffs – just barely. But by 1992 the Bears were losers and – unimaginably – Ditka was fired.
I bring up this bit of sports trivia because – and I do not exaggerate here – in the summer of 2012 Mario Draghi allegedly “saved” the Eurozone by uttering just one sentence: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.”
Draghi implied that the ECB would violate the “no bailout” clause in the Maastricht Treaty. This is the clause that has prevented an immediate solution for the “united-but-not-really” Eurozone.
But Draghi’s promise, like the same one from “Iron Mike”, was apparently enough to will victory into reality: high finance relented, the more troubled Eurozone economies saw their bond interest rates plummet and Draghi is considered the most successful central banker working.
And that takes us all the way to today.
However, the fact that I can leap ahead by more than five years so easily is the real problem.
Because since the 2012 crisis there has been no reform, no increase of democracy, no increase of Eurogroup accountability and no changes to or within that bankers cabal/legal cartel which I just described in part 3 of this 7-part series on the Eurozone.
I have used former Greek Finance Minister Yanis Varoufakis’ 2016 book, “And The Poor Suffer What They Must?” as the jumping-off point for this series. And while I repeatedly expose his allegedly “leftist” analyses and remedies, he has been an invaluable whistleblower, and he has also accurately described the perilous state of not just Greece’s situation, but that of the entire monetary bloc. I will quote his book repeatedly:
“The reason it (Draghi’s promise) worked was that, like a winning bluff, the ECB was never tested. Draghi’s word was taken on trust – or fear to be more precise.”
And because it wasn’t tested, the 1% has never been forced to change the perilous status quo.
So skipping ahead one five-year plan is fine – you aren’t missed anything: the Eurozone is still totally screwed up and, like the 1990 Bears, likely at the end of its own string. We just haven’t had a crisis since then to make this evident, nor have we had an “unimaginable” termination take place. Yet….
Back in 2012 we thought the Latin Front would push back the fascist Germans
(Just to be clear: that subhed is not an exaggeration, because neoliberalism is a form of fascism.)
I remember covering France in that summer of 2012 – optimism was extremely high.
France’s new president Francois Hollande was given a clear anti-austerity mandate, and a united “Latin Front” was finally going to throw its weight around. Mario Monti’s call for a very necessary pan-Eurozone banking union broke the taboo against honest talk on this subject. Because it was such obvious good sense, Germany was forced to accept it…but only in public – privately they totally defanged it.
The resulting banking union does not reach anywhere close to all of Europe’s 6,000 banks; the collective insurance fund for failed banks is totally inadequate in the case of a crisis; and there is still no common, Eurozone-wide banking regulation. It will not stand up to a stiff breeze, much less another crisis.
This failure means that: “…the nexus of failed banks and bankrupt member states – the hideous embrace – was to be preserved intact….Europe’s celebrated banking union lives in name only, while in reality and in practice its banking disunion is as toxic as ever.”
Hollande, “the meekest of leaders” per Varoufakis, soon totally capitulated on multiple other fronts, anyway, even though high finance put no pressure on France’s bond market. I speculated in Part 2 of this series that they knew the whole time that he was a paper tiger, and I have also called him the ultimate patsy. The end result was that he became the first West European president who couldn’t even run for re-election that I can recall, and that the pan-European optimism of 2012 did not even last the year.
So do not be mistaken: where we are today is not structurally different than in 2012.
Italy, Spain, Greece, etc.: it’s not only that they are even more in deeply in debt than in 2012, it’s that they are still unsustainably in debt. And it’s not only that the Eurozone’s banking system is structurally unsound; it’s that many mistakenly believe that its structural problems have been fixed since 2012.
It’s this mix of multinational risk combined with delusions of economic health which is so perilous to the entire global economy. In 2017 an economy can absolutely run on faith, but it cannot run perpetually on ignorance.
So what did Draghi and the Eurogroup do with their 5-year reprieve? What else could capitalists possibly do? They enriched themselves and their fellow oligarchs, only.
Why is a crisis still certain? Nothing was delivered, locally
With the extra time he gained from his bluff, Draghi introduced multiple waves of Quantitative Easing.
Yes, the ECB has bought $2.5 trillion of government bonds under just the latest wave of QE measures, which began in March 2015. This amount is double what they initially promised (…so much for capitalism’s “superior efficiency to socialism”). It is also slightly more than the entire GNP of France in 2016; so take all the value of goods and services Frenchmen produced last year, and now put it in one place – the pockets of the 1%.
Because everybody living under Eurozone austerity feels – even if they may not be able to fully intellectually explain – the reality that all of the ECB loans in QE have gone for…nothing.
They have not strengthened the real economy by building any infrastructure, which would have improved the ease of doing business and thus increased state revenue; nor funded any pension, health or education programs, which would reduce fiscal drags and produce productive tax streams; nor gone into wage increases which would have increased consumer demand universally and provided economic growth. Any of these would have qualified as “good debt”, which would have produced multiple euros for every euro invested.
The ECB’s “invented money” has instead been used for societally unproductive investments, mainly in the stock market, just like the Fed’s did in the United States.
Stocks are high solely because rich entities are flooded with bailout money and 0% interest rates, which let them borrow even more money at no cost. What do you often do with an unexpected payout, assuming that your personal financial situation is stable? You play with it, and for rich people that means wagering in the stock market, thus creating the demand that has pushed up stock prices.
The US stock market has tripled since 2009 and doubled since 2012 – how much of this is money from European taxpayers? France’s CAC40 stock market has doubled since 2009 and is up 65% since 2012, despite a horrible, near-recession growth rate of about 1% overall since then. The real estate bubble in Paris is likely now at a record high. This is all even though the Eurozone’s economic growth rate since 2011 is 0.8%, with just 1.8% and 1.7% projected for the next two years. There is no longer ANY doubt that the Eurozone will have a “lost decade” – sad….
But wait, there’s more!
The super-low interest rates are actually penalizing savers and pension funds – i.e., banking for regular people – and this is more weakness added to the “real economy” (as opposed to the fake “FIRE economy” of Finance, Insurance and Real Estate). The average person has also had their purchasing power gutted even further by inflation (up a combined 24% since 2000 in France), so they are even less capable to come to the rescue of an economy hijacked by bankers than they were in 2009.
Quantitative Easing is simply a get-rich quick scheme, and when it stops flowing speculators will go back to exactly where they were in 2012: holding poorer governments hostage in the bond market, as I described in detail at the end of Part 3.
If you do not let the absence of crisis mislead you into thinking that things have fundamentally changed…you will be doing a lot better than many leaders in Europe, who are also seemingly persuaded that things have fundamentally improved as well….
Nothing was delivered transnationally, either
QE was never meant to go to the Greeces or the jobless of the Eurozone, the people who are a drag on the Eurozone’s growth.
Firstly, due to the EU’s “no bailout” rule, any country which accepted a bailout could not be involved in QE. So Greece, the country most in need, is not getting anything from QE. Moral of the story: don’t get a Troika bailout, of course.
Secondly, to not violate the “no bailout” rule, QE has benefitted the richest economies the most. The way the system works is proportional, and not sensible – just check the so-called “capital key” to see how much each nation has received.
A sensible approach would be if the ECB did not buy any German bonds – as their interest rates are low and there is no inflation – but instead targeted their bond-buying for the poor economies. “Nein”, said Germany, as they reject any attempt at wealth redistribution to poorer/trade deficit nations, or any change to a status quo which has them placed as the top dog.
So it’s all been proportional – the ECB hands Germany 18%, France 16%…and Portugal 2%, etc., even though countries like Portugal, Ireland, etc. need a much bigger portion (of course not because of Portugal’s or Ireland’s flaws, but because the citizens of these nations have been forced to bail out the mistakes of mostly French, German and Dutch banks).
Varoufakis mistakenly says this is “…in order maintain the fiction that the ECB’s silly charter is respected.” But from a leftist point of view, calling it a delusional “fiction”, or denigrating it as “silly” is quite lazy as well as incorrect: This perpetuation of economic inequality via the “capital key” is textbook capitalism – “the rich get richer” and to hell with socialist solidarity.
Thirdly, QE is not based on any “central planning”, so it was never going to be distributed democratically to begin with.
Central planning – subduing capitalist entities underneath the needs of the People – is a key foundation of communism, and what allowed Iran, Cuba and China to weather the 2009 financial storm with solid economic growth (even when compounded by a Cold Financial War in the cases of Iran and Cuba (impressive, no?)).
Because the Eurozone is capitalist, the fundamental idea behind QE is: if you give a huge supply of free money to the rich ruling oligarchy (bankers)… they will do what’s best for society with it.
That’s amusing…but then, I’m a God-fearing communist. Communism says: if you give a huge supply of free money to an avant-garde political leadership drawn from all sectors of society, they will do what’s best for society with it. And they do… certainly their track record is far, far better in the last four decades, even with the implosion of the USSR.
Regardless of my opinion and the differences between capitalist and communist economic planning: “QE works, but even under the best possible circumstances works neither very well nor in the manner it is intended to.”
Right again, Yanis. But wrong again, Yanis: it was always “intended” for the 1% – this is not socialism.
So to put it simply, QE has acted essentially as a shock absorber: the 2009 crisis laid the structural problems of the Eurozone bare; high finance freaked out in 2012; they have been pacified with free money; but when that is gone the road will necessarily get much bumpier.
“Mr. Draghi’s QE caused the price of shares and upmarket property in surplus countries like Germany and Holland to go up, but it did not help mobilize idle savings in those countries by turning them into productive investments, and it especially failed to do this in the crisis countries. And yet the financial press seems convinced that QE has worked.”
This passage shows the perils of confusing a politician with a journalist: a professional journalist knows that Holland is NOT a country but a region of the Netherlands (in English usage).
This passage also shows the perils of a politician posing as a genuine leftist, because Varoufakis doesn’t realize that the financial press is almost exclusively read by the 1%, and aims to advance the needs of the 1%. The financial press is not at all interested in pushing a broad “growth-based” economy which would benefit the 99%. This “financial press” he is talking about is The Economist, The Wall Street Journal, Le Figaro, etc. – it is not the business editor of Cuba’s Granma, after all! So, of course, for the financial press QE definitely has “worked”!
But for the average mainstream media – as differentiated from the financial press – they definitely do deserve demerits for failing to champion the needs of the 99% by acting in direct opposition to their colleagues who shave, have square haircuts and wear pinstripe suits. However, in my experience, the average Westerner is never even exposed to the analytical tools provided by leftist economic thought, and the average Western mainstream journalist is no different; they evince very little interest in economics whatsoever, and have been successfully intimidated into worshiping at the altar of Brahmin technocrats they presume to be speaking Sanskrit.
Fourth, we must ask: what is the collateral which is funding QE?
Of course, the Eurozone has not given up $2.5 trillion worth of gold….
They have created this money out of “air”, which they lend to national central banks in the Eurozone, who then distribute the “air” to private banks, who instead of loaning it out for lower-yield but socially-productive investments instead invest the “air” in a high-yielding stock market, which also allows stockholders to show private banks their “air” inflated stocks as collateral to get more private loans to feed their lifestyle, and all this “air” increases the balance sheets/assets of private banks, empowering private banks to give different “air” (they now totally own) to national governments in the form of bond buying, and this private bank “air” then permits the Eurozone’s national governments to fund their budgets, and this continued ability to remain solvent/aversion of bankruptcy/haircuts gives the Eurozone’s national governments the credibility to collectively back the ECB’s original “air” loan.
Air to air to air to air to air to air…. And this dance happens every month to the tune of €60 billion.
Somebody is smiling, but it’s not you or me.
So we see that at a transnational level, the highest level of the Eurozone: the bailouts were always intended to benefit the rich more than the poor, and that they were always intended to satisfy the 1% and high finance, and never intended to repair the causes of the economic crisis.
Again, this is not 500 BC – the problem is not that gold for warriors has been replaced by air; it’s where the air has gone.
And the only way to get this money back would be to suspend the right to private property and confiscate as much as you can before the 1% flees with their pockets packed. And then the only way to hold on to what was rightfully confiscated would be to make this revolution a socialist one. History has proven this repeatedly, but not often, sadly.
The simple reason QE hasn’t worked: it forgets who is really in charge
Firstly, but most importantly, QE never works:
“In Japan and in the United States QE failed to bring about recovery, but at least it ensured that the recession was not allowed to turn into a depression.”
Therefore a far weaker structure like the Eurozone is sure to produce less positive results.
If you want to stop reading here, I think you can make your predictions for the Eurozone’s future based on just that one sentence.
I remind everyone that – because busts are inevitable in a capitalist system which rejects central planning – the main barometer of success in a capitalist system is: “How long do the inevitable recessions last, and how deep are they?” The answers for the Eurozone are: at least 10 years with no end in sight, and, second only to the Great Depression.
But here is the main issue of why “air” is not working – it is not based on the understanding that The People are the main economic drivers, and not high finance:
Banks and central banks are not being forced to lend the risky air money to businesses and individuals, as they would in a communist government or even a Japanese-style government pre-1985 Plaza Accord. Therefore, the bankers have money but they have decided to have no confidence in the situation, and do not inject anything into the “real economy”. Therefore, they don’t lend to businesses – small, medium and large. These real, employing businesses then have no money for expansion or new hires. Those people who actually have a job see that things are stagnant, and are worried, due to the lack of stability. This job instability causes them to have no confidence to take out a loan for a house, car, dishwasher or anything else in the “real economy”. And, therefore, a self-defeating cycle is created and perpetuated.
This analysis – looking at the situation with The People as the primary mover (because they are and must be) – is nowhere in Varoufakis’ book: He does not understand that worker confidence and stability is the true bedrock of any economy.
So it is not the confidence of investors, stock owners, high finance, currency speculators, real estate magnates or any other get-rich-quick schemers: it is the confidence of the average person which is the key. But we have only heard about the “confidence fairy” of high finance…because Western media is controlled by capitalists and not communists – it is that simple.
But make no mistake: It’s the everyday purchases by The People which have the greatest impact on an economy’s health.
And this supplies yet another reason why the Eurozone is even weaker today than it was in 2017:
Austerity is not just budget cuts and bailouts, but the gutting of labor codes and putting everyone on short-term contracts/part-time work.
This means that citizen-consumers will remain worried about their instability and continue to not buy houses, cars, etc. Thus, the strongest economic brake is being applied full-strength, and for the foreseeable future in the Eurozone and Western economies as a whole.
The problem is that a capitalist society’s democracy allows the interests of the rich to take precedence. Always. If some “trickles down”, then fine. If it doesn’t trickle down – they could not care less. Of course, a communist would say to all this: “Well, that’s why we switched over.”
Anyway, back to QE – the alleged “solution” – and what the next steps will inevitably be (failing a socialist revolution):
“…the net effect (of QE) on employment in the Eurozone was negligible (I add this to restate a commonly-known fact). The non-negligible reality is that Europe is devaluing its own labour through internal competition in the 1930s.”
In brief, the capitalists want everyone in the Eurozone to go through the reactionary “Hartz Reforms” of pre-crisis Germany, which promoted part-time work and, of course, shot poverty and inequality through the roof. This is what Macron has just done with his labor code decree.
But, really, this is not the German but the “American model”: part-time, wages over salary, high poverty, high inequality, high instability…but low official unemployment rates combined with just enough of a social safety net to prevent mass homelessness.
This is the culmination of the Western Model. This is Western imperialism turned inward.
This is all the Western Model has achieved since the Great Depression, because previous social gains are gone or going. Other nations would be crazy to follow….
What I’ve described is a multi-year process, and certainly secret, but also certainly as clear as day.
The exceptional Troika-led punishment of Greece makes logical sense only in this context of internal devaluation/fostering internal competition/gutting of labor codes.
Varoufakis relates an anecdote when he queried an interlocutor with the ECB and IMF about why on earth was the Troika insisting on a regressive sales tax (regressive because it falls equally on everyone, as opposed to a “progressive tax” which targets the rich ones most able to pay), which would only depress state tax revenue, thus giving Greece less money to pay back their “aid” with? Varoufakis was told:
“’Someone whose views matter here wants to demonstrate to Paris what is in store for France if they refuse to enact structural reforms.’”
Like I said, barring revolution as the next step, that’s what’s in store across the Eurozone: the Troika in any nation which refuses to implement neoliberalism on their own.
It is much, much, much better – Greece shows – to fall in line and beggar-your-neighbor, literally, than to let the Troika do it for you.
Nice monetary bloc y’all got here…I hate to see what you do to your enemies.
The crisis is coming and the world is saying so
So a failed decade will be certain, as will a failed two decades…just like in Japan, which went through all this before the Eurozone, being more bound (and bound earlier) to the United States as Japan’s 1% foolishly chose to be.
(I get into the Japanese precedent, and the clear precedent of their “failed score”, in the final part of this series.)
QE has already been extended further than originally intended, but it’s supposed to gradually taper off in 2018, possibly terminating in August.
This will be decided on October 25.
But QE will stop, because the Eurozone is not the United States: this is yet another delusion which adds to the likelihood of a Eurozone collapse:
The US Fed can print an endless amount of dollars, but the ECB has limits which are heavily influenced by Germany…and the bottom line is that Germany is looking out for Germany and not the Eurozone as a whole. It is truly as if New York could say to Idaho: “If you don’t pay us, expect a visit from our repossessors tomorrow.”
This anti-social behavior from Germany goes back decades; goes against the wishes of other euro zone members; and which I described in historical detail in the 2nd part of this series, Why no Petroeuro? or France’s historic effort to create a permanently anti-austerity Eurozone.
And what happens when Germany insists on turning off the ECB’s tap – and there is only the question of “when” and not “if”? Those economies – Italy, Spain, etc. – which were targeted by speculators in 2012 will simply be targeted again.
And why wouldn’t they?
Austerity “deforms” have only produced near-recession levels of real growth; loans created from invisible digital euros have gone into the stock market and not to boost productivity or health in the “real economy”; individual savings have not been increased due to zero percent interest rates; consumer confidence is only going to get lower as the number of part-time work increases due to the gutting of labor codes.
So why wouldn’t greedy capitalists NOT charge higher interest rates once the ECB removes its support? Things are far, far worse than in 2012!
The same major economies will return to looking like they will need a Troika-led bailout program. This will be refused, again, by Italy and Spain, as they are too powerful, and that’s when the “multi-speed Eurozone” will begin.
This takes us to the 5th part of this series: The Eurozone has likely entered its final calendar year, contraction coming
So I guess this article’s headline underestimated things a bit – the Eurozone is FAR MORE primed for collapse than ever.
This is the fourth article I have written in a 7-part series on today’s Eurozone which will combine some of Varoufakis’ ideas with my 8 years of covering the crisis first-hand from Paris.
Here is the list of articles slated to be published, and I hope you will find them useful in your leftist struggle!
The Eurozone: still as primed for collapse as ever
The Eurozone has likely entered its final calendar year, contraction coming
The English-speaking world’s fear of calling communism, ‘communism’
Forced recession as a tool of social war against the 99%