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The bosses’ attack on European living standards

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.



Comment from Marco
Time July 8, 2010 at 12:31 pm


This analysis is not bad, not bad at all. But it does leave aside what I believe is the greatest immediate threat: the two-headed monster of private debt and unregulated financial capital.

It’s not public debt that will sink the global economy, although it could sink a couple of European countries.

If one thinks about the GFC, the immediate trigger was the amount of private debt that could no longer be serviced. People think of the US, but basically all the so-called developed world was affected (yes, we in Oz were and are affected, too).

It was that very private debt that largely allowed consumption growth during the “Great Moderation”, as incomes either did not grow at all, or grew too slowly.

I will quote Paul Krugman here:

Inequality and Crises

Have a look at the slides of his talk. He FINALLY draw a link between the GFC, indebtedness and inequality.

During the GFC there was some deleveraging, specially in corporate private debt; but household private debt has barely changed and it’s indeed growing again in many places.

Now, what happens if people, crushed by (1) a tax burden that will be lifted on capital (but will be increased on consumption, as in the UK, for instance, with the VAT increase), (2) cuts in social government spending and (3) suffering from a likely fall in incomes, again can’t service their debt?

In the last G20 Obama, for all his posturing against the financial services industry, opposed the already watered-down regulatory measures proposed by Merkel. What happens if the bloody banks start shifting money willy-nilly from here to there, back and forth, unhindered by even the modest measures that a year ago the G20 had considered urgent?

In the 1930s there was a double-dip depression and it was caused by a premature tightening of fiscal and monetary policies…

The first time it was a drama, the second time it could be a farce… if it weren’t so terrible.

Comment from Arjay
Time July 8, 2010 at 7:49 pm

Webster Griffin Tarpley predicted last year that severe austerity would be the order of the day.

We have $ trillions tied up in derivatives,credit default swaps etc. Ordinary people’s super is intermeshed with this phoney money.What they are trying to do is make us pay for their devious theft our productivity.

They are propping up the phoney money with severe austerity.This will however destroy real productivity.Kill the incentive to achieve and the economy dies.

It works like this.The Global Reserve Banks create money in their computers.When they create too much we have inflation.Inflation generally is not created by workers.The prime movers are Banks and our complicit Govts.Our Govts borrow from the International Banksters and thus increase taxes to pay for interest,bloated bureaucracies and waste eg the Education Revolution and batts in our belfrey.

Every 10 yrs our currencies depreciate by 40% even with 3.4% infaltion.The banks create all this extra money mostly through debt.So money is created by debt.Hence we have so much debt,we cannot afford infrastructure.We then sell off Govt assets to pay for basic services and increase taxes again to cover losses of income from these assets.

The result is the loss of the middle class and looming poverty.

Comment from Arjay
Time July 8, 2010 at 8:48 pm

Community announcement.
This Sunday 11th July 12.00 midday 9/11 Truth Australia will be at 140 George St Sydney (Museum of Contemporary Art) to herald the arrival of Prof Neils Harrit whose peer reviewed paper (including the research of 8 other international scientists) demonstrates that a highly sophistocated explosive called nano thermite was present in the dust and rubble of 911.


Why are we fighting wars in oil/resource rich islamic countries? Could the same oligarchs be responsible for the GFC?