En Passant

Martin Wolf described it as “a bloodbath”. The Financial Times editorial called it a “chilling read”. Britain’s budget is one of austerity, the likes of which has not been seen in generations. A 25 per cent cut in public spending; a quarter of a million or more public sector jobs to be slashed. It is just the beginning.

Already there are calls for the next budget to go further. In a country where – even before the crisis hit – over a quarter of the population was considered “breadline poor”, the establishment is crying out: “Everyone has it too good!” It is a call echoing through the corridors of power the world over.

Ireland, Greece, Britain, Italy, France and Germany, not to mention Eastern Europe, are on the neoliberal wagon – big time. Yet as Ireland and Greece are showing, austerity is unlikely to solve the problems. As economic growth falters, state revenues fall; if deflation sets in – a very real possibility – debt burdens will increase. One or two defaults seem certain to occur.

Yet the ruling classes are unperturbed. Their main concern is not simply to manage the fallout from the financial crisis. They have a long-term plan to completely smash the working class, drive down consumption and reshape expectations of how a human being is entitled to live. As a British treasury official quoted in the Financial Times prior to the budget expressed it:

“Anyone who thinks the spending review is just about saving money is missing the point… This is a once-in-a-generation opportunity to transform the way that government works.”

That is, government should not work. Not for the poor at least. It was once said that capitalism can survive any crisis so long as workers can be made to bear the brunt of it. Maybe; the problem for the rich and powerful, however, is that this crisis is structural. Workers and the poor did not cause it. Attacking them – even if it means taking away every social-democratic gain of the last 60 years – will not solve it. The rich also need to push the burden of payments onto each other.

This is the context in which the Toronto G20 summit was held. There is a rift apparent coming out of the meeting; it is hard to tell how wide or deep it is, but it is significant. On one side are the Europeans and Japan, who are implementing austerity; on the other is the US, which is warning that contractionary policy at this point could be disastrous.

Paul Krugman has complained that the turn to fiscal tightening in Europe represents “the victory of an orthodoxy that has little to do with rational analysis…”

If it were simply about ideology then this would be true (and would seem to represent an historic shift – the Americans arguing for more state spending and the Europeans calling for cuts to benefits). But the rich and powerful are a pragmatic bunch, and not all that interested in theory. Their turn to austerity is part of a calculated strategy of beggar thy neighbour. It may be collectively self-defeating, but at an individual country level, it is not in the slightest irrational.

To understand what is going on we first need to acknowledge that the only things that matter in the make-believe world of “G20 consensus” are what the big economies do. As with all things international, agreements are held together by power, not consensus. That was as true of the “coalition of the willing” in Iraq as it is with G20 communiqués.

The Toronto summit was about Germany, the US and China. To a lesser extent it was about Japan, France and Britain. Everyone else was there to make up the numbers, give political support and/or have their tails kicked into line.

The summit declaration contains two significant proposals that advanced economies are to adhere to. Firstly there is a pledge to enable “fiscal plans that will at least halve deficits by 2013 and stabilise or reduce government debt-to-GDP ratios by 2016.” This is the austerity being unleashed in such chilling fashion in Europe. It represents the biggest attack on the working class in the post-war period.

The second G20 directive is that “surplus economies will undertake reforms to reduce their reliance on external demand and focus more on domestic sources of growth.” This is aimed squarely at Germany and China. For the last decade, the US has played the role of “spender of last resort”; the borrowing they did over the last decade was the prop for global growth, and now they figure it is time for the Germans and the Chinese to return the favour.

The German austerity package shows that German capital is having none of it. Neither is any of Europe. And China is moving to moderate growth. In fact, almost every other government has decided to start, or continue, saving. This will mean lower consumer spending, and quite possibly, less investment growth. Imports are much more likely to be lower than would otherwise be the case.

In this regard, European desires for a devalued currency, a cut in domestic spending, wage cuts and revived exports are at odds with the US ruling class’s plans. (Note, however, that Europe is far from unified – Greece and Ireland have been kicked into line by the German establishment, for example.)

The Chinese are making moves to “rebalance” – the writing is on the wall in terms of their capacity to continue mass exports to a euro zone which is squeezing consumption, and a US whose future looks none too secure – but they do not have the capacity to be a sponge for European and US consumer exports.

With their economy still growing, they will continue to import heavy industrial equipment and machinery from Germany, Japan and the US. But with their own export markets depressed, they will struggle in the medium term: they are unlikely to be able to suck up their own output, let alone pick up the slack from the rest of the world.

With everyone else saving, the US is under pressure to do the same. The conservatives in the US blocking supply to state and local governments are not ideologically dogmatic in this regard. This is capital trying to “keep it real”. Yet at the moment, the administration can’t bring itself to go all out on austerity. The US economy is growing faster than the euro zone, but the job and housing data indicates that the recovery is fragile. The government is hesitant to wean it off spending.

When it finally does, the reality that not everyone can be an exporter and run trade surpluses will weigh on the world. Someone has to be a buyer and borrower. To make things worse for American capital, the US currency has appreciated against the euro and is overvalued against the yuan, despite the latter’s recent appreciation. All this makes exporting that much harder.

Moreover, the longer-term problems in the advanced economies – trend declines in growth and investment rates, underpinned by stagnating returns on investment – that were masked by the build-up of debt have been exposed.

From the 1980s a sizeable proportion of the overall profits in the economy were fed into the financial sector in search of higher rates of profit. The result was the significant expansion of the global financial sector and the morphing of productive industrial corporations into something “resembling financial outfits”.

Over the last decade and a half in particular, personal consumption was held artificially high to compensate for lower productive consumption. Company after company was cooking the books in order to propel stock prices higher.

By 2005 the financial markets were trading the equivalent of the total annual value of global exports every four days. But while the returns were much better in this sphere, they came at the cost of a series of speculative bubbles and debt crises:

There was the Third World debt crisis of the 1980s; the US stock market collapse of 1987; the partial collapse of the savings and loan industry in the US from 1989; Japan’s property and stock price crash from 1990; the East Asian financial crisis; the dot-com stock market collapse; and the recent property collapse in the US and western Europe.

The war of capital against labour waged via government policy has already intensified in Europe to a degree unseen since the 1930s Depression. The US has begun to follow suit. Mass layoffs and driving down wages has not been enough to revive economies. Austerity will not do the trick either; it will likely make things worse overall.

To say that everything now is hanging by a thread might be overstating it. But when the current recovery stalls – as it is almost certain to do – the divisions between the ruling classes of different nations will be further exposed. They will push harder against each other to shift the burden of responsibility.

Today’s currency complaints and fiscal disagreements are set to get a whole lot nastier; government attacks a whole lot worse.

This article, by Ben Hillier, first appeared in Socialist Alternative.