Tuesday, 20 December 2011

Europe's Crisis Measures

It doesn't really matter what you think about the prospects of the euro system surviving long-term, or how much you might focus on the evident flaws in its design and the economic trials of its members today. It is a political project, and state power is now being used to save it. My own view, expressed in the previous article 'Cameron, Merkozy & Europe', is that it will survive for an indefinite period (ie for a year or so, at least). The debt numbers are vast and the austerity to come is horrible, but the alternative is far from attractive, even for Greece.

More importantly, Germany and other key powers are not likely to give up on a system that has worked for them in the past and might still work for them in the future. One sign that this is true is the change in the operations of the European Central Bank. Look at the latest FT story on how expansive their credit will now be. The ECB is offering a huge volume of 3-year loans - perhaps more than €500bn - at low interest rates to banks, funds that they can use, and probably will use, to finance their governments as well as themselves. This far from 'solves' the crisis, but it means that the risk of the euro system tripping into an abyss over the next year because the banking system collapses is far less. The ECB may not be a 'lender of last resort', but it is a lender that understands when its existence is at stake. This measure is a signal of the absurdity of thinking that central banks are 'independent'. Independent of what exactly? They are certainly not indifferent to the viability of imperialist capital. Ask the Fed, the Bank of England or any of the others that have amended their formerly sacrosanct rules in order to try and save the system.

Tony Norfield, 20 December 2011

Monday, 12 December 2011

Cameron, Merkozy & Europe

The latest European summit to ‘save the euro’ did little to achieve that end. Instead it revealed the growing political divisions between the UK and the main driving forces of the European Union, Germany and France. We are witnessing another stage in the rebalancing of relationships between the major powers. This article examines what is happening, drawing on the historical background to give insights into current developments. One insight is that the capitalist crisis is far more likely to bring further political deals than to see the collapse of the euro.

The latest news is a big setback for British policy, since the UK can no longer play the role of an important party with a key vote in European negotiations. The foundations of the British position were already crumbling before this week, since the 17 euro member countries within the 27 strong European Union already have a wide range of institutions making policy in areas over which they have exclusive control.[1] Being outside the euro, but a key member of the remaining 10 countries, Britain hoped to maintain a significant voice in policy decisions affecting all EU members. That prospect is now over. As a columnist on the Financial Times put it, the decision by the euro countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce a break up of the European Union itself.[2] 

This may not immediately be obvious. After all, the 10 non-euro countries are still clearly outside the euro group. Why should they follow policies designed to save the euro group? The reason is that all, except the UK and Denmark, are obliged to join the euro system when they meet the membership criteria.[3] If they wanted to join in the foreseeable future, they would have to meet the new criteria; even if they did not, they would all feel under pressure to agree to any new policies that would appear to stabilise the euro system, not least because their economies are very closely tied to that system. By Friday 9 December, they all did agree in principle - with the exception of the UK. 

Prime Minister Cameron was opposed to a political deal among the 27 European Union members to change European Treaties unless there was an exception made for the UK on any future rules that might impinge on the British financial sector. One report claimed that Cameron went too far in the way he proposed this demand. He wanted the EU to pass “a protocol imposing decision-making by unanimity on a number of areas of regulation currently decided by majority voting”.[4] This was seen as a bad precedent for future decision-making, and France and Germany refused to allow it: “Our British friends made unacceptable demands,” said President Nicolas Sarkozy. They claimed that their proposals would improve policies on managing government deficits, and found the UK opt-out unacceptable. It is a sign of how important the UK financial sector is to British imperialism that Cameron was prepared to take this stance.[5] 

My understanding is that the suggested (although not yet even proposed) EU-wide Financial Transactions Tax would require unanimous EU voting approval. In this case, Cameron’s position was a diplomatic blunder. He should also have realised that the last thing that France and Germany would have allowed is to exempt financial markets from further policy measures when they are blaming financial markets for all their problems! Raising the issue in this way was an especially stupid move by Cameron at a time when the EU is trying desperately to save the euro. Nevertheless, economics rules politics, and Cameron’s policy stance was inevitable, given British imperialism’s core interests. Even if there were no plans to impose a transactions tax, or he could stop the tax in the UK, he would still fear other measures that might damage the City of London's potential for parasitism.

France and Germany will probably not plan in future for EU Treaty changes to implement policies because these require unanimous agreement among the 27 EU members. But they are beginning a process to make inter-governmental policy decisions within the EU and without the UK. So Britain is not only outside the euro currency group of 17 countries, it also faces diplomatic isolation. The Telegraph notes a wide range of comments to this effect from major news media in Germany and France, together with reports that the two countries will set up a new ‘Euro-Plus’ group of countries. The immediate policy objectives of the new group would include the “need to foster growth through greater competitiveness as well as greater convergence of economic policies … To these aims, a new common legal framework should be established to allowing for faster progress in specific areas such as financial regulation, labour markets, convergence and harmonisation of corporate tax base and creation of a financial transaction tax." [6] Depending on the manner in which any new policies are proposed, it might also turn out that a majority vote would suffice to make it law within the whole of the EU. 

Why the new euro policy, and will it work? 

While these developments break new ground for European politics, the new Franco-German policies will do very little to shore up the euro, which was the whole point of the summit. The proposed fiscal deal does nothing at all to resolve the current euro debt crisis. It could be asked why new fiscal borrowing rules even had to be raised at this point within the whole EU and not just within the euro member group. The reason is partly as suggested above: the fact that eight of the 10 non-EU members are presumed to be willing to join EMU at some stage, so they would need to be willing to get their fiscal policies in order ahead of this. There is also the factor that a Treaty change was necessary to force the new fiscal rules into national law, not just as an informal agreement between members. 

These fiscal rules will not now be implemented via a Treaty change, and it will take a long time for them to be accepted by different countries. Some may even decide that the German proposal for an externally imposed cut off point for fiscal deficits does not make any sense (it doesn’t). However, the proposal does provide a policy fig leaf for the European Central Bank to begin to intervene more aggressively in debt markets to buy – or to encourage euro banks to buy - the bonds of countries hit by the crisis.[7] Reuters has even quoted Sarkozy saying that private banks could borrow from the ECB at 1% and then lend on to their governments! It is unclear how far the ECB would allow this, but if it did then Italian banks would be able to lend to the Italian government at rates much lower than the current market rate (6-7% in Italy’s case). This kind of fix, which would have been seen as outrageous only a few years ago, is now par for the course. Apart from that, Chancellor Merkel probably hopes that the new fiscal plans it will play a role in persuading the Bundestag to agree new euro rescue spending. Here the argument will be that the new strict budget rules will prevent unending bail-outs.

All this might buy time, a currency the ECB cannot print, before yet more plans are laid to try and secure the euro monetary system. Nevertheless, there will still be demands for austerity in most countries. While austerity will undoubtedly make the crisis worse, there is no real scope for further economic stimulus. It is not only that debt levels are already very high; in recent years there has been a steadily diminishing effect on the economy from the accumulation of debt.[8] Now the debt itself has become a key problem, threatening financial collapse. This has nothing to do with the euro; it is a feature of all major capitalist economies, certainly including Britain. Within the euro system, however, Bloomberg reports that governments have to repay (and so get a refinancing of) more than €1.1 trillion of long- and short-term debt in 2012, with about €519 billion of Italian, French and German debt maturing in the first half of the 2012 alone.[9] That sum is more than huge, and is a reason why regaining ‘market confidence’ is a prime policy objective for all euro countries. A dive in the euro’s value on foreign exchanges and a several percent drop in stockmarkets on Monday suggest that ‘confidence’ has not been restored. 

The euro: history of the present 

The institutional design of the euro system is a mess, one that was recognised by many writers before EMU began in 1999. A single currency across such a wide range of countries is bound to need a mechanism for fiscal transfers from a central fund towards which everyone contributes. An effective fiscal transfer mechanism also implies a political union, or some kind of agreement between member countries that will maintain the integrity of the system. In the case of the euro, the creditor northern European countries - especially, but not only, Germany - wanted to avoid this fiscal union, fearing that they would end up paying all the bills. Instead, they set out various rules of good behaviour, trying to limit government deficits and debt for prospective members. This was the origin of the Maastricht criteria, part of the Treaty setting out the terms of monetary union, signed in 1992. Monetary union is clearly a political deal between member countries that agree to a common set of rules and regulations, but the richer countries wanted the potentially big economic benefits without bearing the possible economic cost of a political responsibility to keep the system working. That view may now be changing, though in a far from clear-headed fashion.

It is worth reviewing some key points in the history of developments towards European monetary union to see how important this project is for the major European powers. This will also show why they are not likely to let it fail, despite the heavy costs that the world crisis has now brought them. 

Economic cooperation in Western Europe began with Germany, France, Italy and the Benelux countries attempting to rationalise their coal and steel industries just after the Second World War. Later, their efforts covered broader areas of the economy, including atomic energy, in the 1957 Treaties of Rome that established the European Economic Community. This economic cooperation was always in the context of rivalry between the six countries, but they had enough shared interests to do important and mutually productive deals. A common objective has been in place since the 1960s: to develop an economic bloc that is a counter-weight to the overwhelming power of the US. EEC membership expanded in the 1970s beyond the core six, to include Britain and others, as the first major crises of the post-war period, with the ensuing economic and financial turmoil, encouraged more countries in Europe to join the trading bloc.

In the 1970s, managing the currencies of member countries moved to the top of the European agenda. For most of the post-war period, global currency rates had been fixed against the dollar under the Bretton Woods system, with only isolated cases of a national currency’s dollar value being revised down (UK, France, Spain) or up (Germany, Japan). After 1971, however, strains on the dollar-based system resulting from relative US economic weakness led it to break down completely. As a result, the European trading bloc tried to develop its own system to limit the damage from currency volatility and the Exchange Rate Mechanism was established in 1979. There were many currency crises over the next two decades, not least sterling collapsing out of the system in 1992 after just two years. But every crisis propelled the core European powers further towards the goal of a single currency, a development that was made clear by the Delors report of 1989. Britain did not join in this process, for reasons covered in the next section.

By the start of monetary union in 1999, 11 countries had joined the single euro currency project. This was well beyond the original concept of perhaps only five members (excluding Italy), or six (all the EEC founders), who could meet strict economic criteria. But the promise of a stable and large economic area had become more attractive. This was especially so after the 1997-98 Asian crisis and the Russian debt default had caused more panic in global trade and financial markets. Both the weaker European countries and the stronger ones wanted economic security. Being part of a group of countries trading together with a common currency looked a lot more appealing than being battered every few years by sharp moves in currencies, interest rates and flows of capital.

Germany, given its economic strength, had always found itself favoured in financial crises. This was as much a curse as a blessing, because strong inflows of financial capital pushed up its exchange rate. A too-strong Deutsche mark threatened the exports of German industry, and trouble elsewhere undermined the weaker countries that were Germany’s external markets. These countries, even those in as favourable a position as France, found themselves on the rack when the DM rose in value, having to raise their interest rates and to impose deflationary policies, or else to devalue and suffer financial penalties. So the single currency system of the euro was seen as good for everybody. By 1999 it also seemed that the broader the euro area, the better to maximise the benefits of cross-border trade and investment.

This was the background to the more relaxed German view of wider EMU membership, a membership that expanded further after 1999. While economic differences between richer and poorer members might be large, all member countries were expected to gain from the single currency and the growing economic relationships. Germany was nevertheless concerned that weaker countries might take advantage of the new euro system, leaving it to pick up most of the bill for any sorting problems out. So strict membership criteria were imposed. Countries could only join the euro if their finances met certain criteria on government debt and deficits, and if their economies looked fit enough to survive in a regime where no devaluations were possible to restore lost competitiveness. 

Of course, in practice the rules were bent. In the lead up to the start of EMU in 1999, public sector debt at 60% of GDP was the rate that European economic policy wonks considered to be the maximum compatible with long-term economic stability. But both Belgium and Italy had debt ratios between 110-120% of GDP – somewhat more than a few decimal points adrift. German politicians and central bankers had always expressed doubts about Italy’s financial integrity. Nevertheless, it was an important trading partner. Belgium’s debt level was even more problematic, however it was so closely integrated with the German economy that a top Bundesbanker once quipped to another European official that their EMU membership was guaranteed – Germany would ‘buy’ Belgium if necessary. As long as these countries promised to sort out the government debt issue over time, that was OK. Belgium and Italy could also claim that they were making good progress, and had cut government spending to meet another rule that the annual deficit was below a maximum 3% of GDP.

These exceptions to the rules made it clear that EMU was as much a game of political decision making as a purely economic project. Expanding the scope of the membership group and increasing the euro’s economic weight also looked like a good idea, even if some of the new prospects were on less stable ground. These potential members had far smaller economies than the two large players, Germany and France, who accounted for half of euro area GDP. If things did not go well, no great trouble was expected. Famous last words, of course, but there were rules to monitor, though not to control, or put sanctions on, the economic performance of member states. Even if there were trouble, the Maastricht Treaty establishing the system said that no member state was liable for the debts of any other member state. It did not turn out that way, as the recent history of Ireland, Greece, Portugal, Spain and Italy shows, but it looked like a good idea at the time.

The euro single currency project was thus born out of a coincidence of interests between the major European countries. Starting from a series of economic policy arrangements, it developed into monetary union, spurred on by the financial crises that are endemic to capitalism. However, the economic currency deal at the core of the euro system did its best to avoid even addressing the political question of what should be done if things go wrong. There was an illusion that economic rules would enable the members to avoid explicit political decisions about who was in charge. This led the US once to complain that they didn’t know whom to call when they wanted to contact ‘Europe’, but the development of the crisis has now put a Berlin telephone number at the top of the list. 

Britain and Europe 

The UK has been happy to be a member of the 27-nation European Union, but it has always dealt with the EU principally as an economic grouping centred around the single market. British politicians have never signed up for the more overtly political dimension of the EU that, especially since the 1989 Delors report, had the objective of drawing all members into a monetary union and, by implication, eventually also into a political union.

Britain’s separation from the European project has rested on its own interests as an imperial power. While Europe is clearly a major trading partner and the location of much British overseas investment, Britain also has a wide range of non-European interests. The strong British political link with the US, the so-called ‘special relationship’, is one means of protecting these. Britain has also depended on the US connection for its military policy, and used it to develop and promote its financial sector, one of the key mechanisms Britain has for deriving profits from the global economy.[10] 

These factors have meant that a succession of British governments did not see a strategic advantage in joining the European project beyond getting involved in the more narrow, single market economic dimensions. For Britain, the real decision on EMU membership was whether there would be an advantage in being part of a single currency system dominated by the decisions of other countries, given that it would also lose control of its currency and monetary policy. Consistently, the British judgement has been no.

In 1991, John Major’s government gained an ‘opt out’ from the Maastricht Treaty – an opt out that not only meant that Britain was not obliged to join EMU at some point, but also that it did not have to sign up to the social and employment chapters of Europe-wide legislation, thus giving British capital a freer hand to downgrade employment conditions. The counterpart to this deal was that Major gave Germany’s Chancellor Kohl clearance to recognise Croatia, a German area of interest in the former Yugoslavia. This was one of the factors helping provoke the savage conflict between Serbs and Croats in Yugoslavia as that country broke up. Croatia is now a candidate member of the EU.

Britain’s longstanding strategy for Europe has been to encourage a wider membership of the EU as a means, it hoped, of delaying or preventing the emergence of a more overtly political union over which it would have less influence. But it is not simply ‘perfidious Albion’ that looks after its own interests, as a report of a meeting on 20 January 1990 between UK Prime Minister Thatcher and French President Mitterand shows. The report is from the UK Cabinet Office and it describes the concerns each leader had with an emergent Germany, one on the verge of re-unification in 1990: 

“President Mitterrand said that he shared the Prime Minister’s concerns about the Germans’ so-called mission in central Europe. The Germans seemed determined to use their influence to dominate Czechoslovakia, Poland and Hungary. That left only Rumania and Bulgaria for the rest of us.” 

Where is our share of the loot? It is in such confidential meetings that imperial plans are more openly admitted. At this time it was not colonisation, but a plan to open up a wider range of countries to exploitation within the orbit of the major powers of the EU. 

Britain’s diplomatic isolation from the other EU countries now puts it in less of a position to do deals with and have leverage over other European countries. It was reported today that the US was not happy with Britain’s new position that makes it a less useful ally, and a far less useful European port-of-call than it was before last week. The conclusion one would have to draw is that British politicians’ self-congratulation about not being part of the euro project is going to be replaced with soul searching on the best route out of this crisis. The Brits can no longer depend on much help from other powers if their own financial system hits the rocks again. Prospects on this score do not look too good. Apart from the huge levels of UK debt that are on the UK government’s books, and on the balance sheets of companies and individuals, there are some other items, such as the loss of £26 billion that it has now incurred from its purchase of shares in Royal Bank of Scotland! 

Conclusion: European power plays

So, we have an interesting situation when it comes to sizing up the positions of the major European powers and what they might do next. Germany’s relative economic strength has come through, but it does not have endless amounts of cash, also being threatened with a credit rating downgrade. Neither does it have the experience of France and the UK in political strategy. The latter have bigger mouths, but smaller wallets, so they have limited room for manoeuvre in a crisis. While the UK is diplomatically isolated, at least until the next bout of turmoil, France is in a not much better position. Sarkozy has rejoiced in the term ‘Merkozy’, at least giving him the position of the back half of the pantomime horse. However, one commentator has suggested that even the term ‘Merkely’ might be overstating his real influence. 

France, nevertheless, does appear to have won a key point in the bilateral deal with Germany that is now put forward as EU-26 policy: private bondholders will not be forced to take any losses in future bond rescue plans. This does a great service to French banks that are much more exposed than their German rivals to potentially defaulting countries. The quid pro quo appears to be that France must sign up to the German-inspired fiscal plans, but that is a pain to be borne on another day. 

Alliances between euro members have traditionally been built on either side of the Franco-German pivot. The balance normally falls in favour of Germany, which has the biggest economy and pays the biggest share of the bills. Germany can count on the Netherlands to be onside, the country that has been within its economic and financial sphere for decades. The first president of the European Central Bank, Wim Duisenberg, was formerly in charge of the Nederlandsche bank, and basically took the position because he was close enough to Germany without being German. Austria, Finland, Belgium and Luxembourg – each a creditor nation - make up the other usual supporters of German policy. France, by comparison, has fewer natural allies among the financially stronger euro members, and its previous overtures to the weaker southern members, Italy and Spain, may not offer much bargaining power in a crisis that affects them most. This explains Sarkozy’s more recent close alliance with Merkel. 

The diplomatic dance is far from over yet, but for now the balance of forces looks to be against British imperialism - at least until the next euro crisis. Cameron must be feeling miffed that the alliance with Sarkozy has broken up so soon after the cooperation in attacking Libya. He must also be feeling sidelined by Merkel who declared that “I don't believe David Cameron was ever with us at the table.” [11] While Merkel and Sarkozy have a marriage of convenience, their union looks to be somewhat longer lasting, resting as it does on the joint need to keep the euro show on the road.

Tony Norfield, 12 December 2011

[1] These include the European Central Bank, the European Financial Stability Facility, the euro group of finance ministers, etc. However, in the past, decisions that might affect the outer group of 10 countries were normally negotiated at the EU level among the 27 members.
[2] Wolfgang Münchau, ‘The only way to save the eurozone is to destroy the EU’, Financial Times, 9 December 2011.
[3] Sweden has a de facto opt out, not the legal one given to the UK and Denmark. Sweden did not join the exchange rate mechanism, a pre-condition for joining the euro at a later stage. It also voted against introducing the euro in 2003.
[4] See ‘The moment, behind closed doors, that David Cameron lost his EU argument last night, The Economist, 9 December 2011.
[5] The ‘financial transactions tax’, or the so-called Tobin tax, will never be agreed by the UK, nor by the US, given the importance of the financial sector for these powers in particular among the major imperialists. See for background, ‘The Economics of British Imperialism’ on this blog, 22 May 2011.
[6] See ‘EU treaty: Britain now faces a Europe that is becoming hostile’, The Telegraph, 10 December 2011.
[7] So far the ECB has bought a little over €200bn of government bonds in the secondary market, of which around €50bn are Greek bonds.
[8] See ‘Capitalist crisis, Keynesian delusions’, 5 September 2011 on this blog.
[9] See ‘Euro Leaders Agree Budget Rigor, Leave Next Step to ECB’, Bloomberg 9 December 2011.
[10] Britain’s US connections were also a key reason for France, under De Gaulle, to veto Britain’s EEC membership applications in both 1963 and 1967. The UK eventually joined in 1973.
[11] The Guardian, 9 December 2011.

Saturday, 3 December 2011

Imperialism and the Law of Value

It is rare that you stumble across a gem. But if you look carefully, the probability rises. A few weeks ago I came across one such gem of Marxist analysis. It does the best job I have seen of explaining clearly the principal features of imperial exploitation in the global economy today.

The analysis is found in a PhD thesis entitled ‘Imperialism & the Globalisation of Production’, written by John Smith and dated July 2010. The link to the pdf (1.5MB) that can be downloaded is:

For me, the key contribution of the thesis is a clear conception of how the law of value developed by Marx has to be modified for imperialism today. Lenin defined imperialism as a special stage of capitalism and noted that “If it were necessary to give the briefest possible definition of imperialism we should have to say that imperialism is the monopoly stage of capitalism”. Smith shows how to understand the rise of globalised production under the domination of major corporations as a means by which the imperial powers extract value from oppressed countries.

The common argument one will find – explicitly among academics, implicitly elsewhere – is that in ‘poor countries’ wages are low because productivity is low. The implication is that there is no exploitation of poor countries by the rich ones – the latter are seen as having higher living standards based on their higher productivity. This view is compatible with some comments in Marx’s Capital, and it is a view held by many who claim to have a Marxist understanding. But it has no validity in the world economy today.

Smith shows clearly how various measures to demonstrate higher productivity in the rich countries are based on statistics that distort reality. He gives a striking and concise way to express this: GDP and other statistics that purport to measure ‘value added’ actually reflect value appropriated, not value produced. This tallies with the example I gave about the €4.95 T-shirt in my article on this blog on the ‘China price’.[1] There is much more in Smith’s thesis that is worth discovering, not least a destruction of the myths propagated by many radical critics of imperialism.

One difference I would have with Smith’s analysis is that he tends to work with the view that there is one single ‘value of labour-power’ in the world economy. This implies that the much lower wage in oppressed countries indicates a ‘super-exploitation’ of the workforce, with their wages being far below the value of labour-power (ie below the world average value).

I would agree that a vast reserve army of labour in many countries might allow capitalist companies to pay wages below the value of labour-power in oppressed countries. The extra flows of workers from the countryside into factories, etc, would allow capitalists to pay for their labour supply at rates below what is socially necessary for reproducing the existing workforce. That is besides the frequent use of direct force to raise rates of exploitation. However, I think that a concept more consistent with the theory of value under imperialism is that there are different values of labour-power worldwide, rather than there being an ‘average’ value that has any reality under imperialism.[2]

Insofar as companies move from ‘high cost labour’ areas and gravitate towards ‘cheap labour’ areas, then wages will be pressured lower in the former and higher in the latter countries. To that extent there will be an averaging process. However, the process is very prolonged and very uneven. It is also a process that is starting from a position where differences in living standards are huge.[3] It may be possible to construct an average of some kind, but if there is no mechanism to make other values move significantly towards that average – at least within 20 years! - then it will have limited use as a concept explaining imperialism today. The persistence of vast differences in living standards between countries closely corresponds to the division of the world economy between oppressor and oppressed countries, and the privileges that the former are able to extract in the world economy. This makes a more direct recognition of these differences the valid approach.

This, however, is a small difference of emphasis. Smith’s work is an original and insightful analysis of imperialism today and is well worth studying. 

Tony Norfield, 3 December 2011.

[1] See ‘What the “China Price” really means’, 4 June 2011 on this blog. The data indicated that the labour cost of the T-shirt made in Bangladesh was roughly 10-15 cents, and the cost on arriving in Hamburg was €1.41, with the rest of the ‘value added’ made up from costs of transport, shop rent, sales and marketing costs, profits, taxes and so forth that added up to the €4.95 shop sale price. This is how the imperialist power ‘adds value’ to the product of sweated labour in the official statistics!
[2] Smith certainly recognises these differences, and he cites the immigration controls that are a principal factor keeping them in place. Control of the world economy by monopolistic capital sees many other barriers to the ‘free market’ that will result in longstanding differences in rates of return on investment, etc. This does not suspend the law of value, but shows that it operates in a different way under imperialism than when Marx was writing.
[3] For example, hourly compensation costs in manufacturing may be 10, 20 or 30 times higher in the US than in oppressed countries, see ‘What the “China Price” really means’, 4 June 2011. The charts in this article show a clear, massive divergence of wage levels between imperial and oppressed countries.

Wednesday, 23 November 2011

Bunga Bunga Bund?

Germany today held one of its regular auctions of government securities, an auction that turned into what was reported to be a ‘disaster’. There were no explosions and casualties, but the event highlights another stage in the worsening economic and financial crisis. Germany, the euro area’s richest and most powerful member, could not borrow as much as it planned to. How much worse is it going to be for the other members, or indeed for all heavily indebted countries?

Occasionally it happens that a government auction of securities does not attract enough investor finance. This can occur when financial markets are in turmoil and decide that the price is not low enough. However, usually the government is aware of the problems and the auction is managed ahead of time. In general, the volume of bids received is more than what is on offer. Even if the bids fail to reach the planned auction size, when things go wrong, then the rare shortfall is only on a small scale.

This time, however, investors only bid for 65% of the €6bn of new 10-year bonds on offer, and some of those bids were much lower than the government would accept! The end result was that the government only sold 61% of what it had planned, leaving it holding the remaining €2.36bn unsold bonds. This size of deficit is extraordinary; there has been none as large since before the launch of the euro in 1999.

The deficit may reflect the fact that German 10-year yields had fallen below 2% and so were unattractive to private investors. Yet, the yields had fallen so low because Germany was always seen as the ‘safe haven’ in Europe, at least within the euro financial system. In the crisis, German yields would fall as the yields on the bonds of the weakest countries rose. Collapses in global equity markets also encouraged funds to flow into bonds: better a low yielding bond than losing as much as 10% in a week in equities. But the failed auction is more likely to signal that Germany will now find that it has less ability to be favoured by capital markets given that it is seen as the paymaster for a system drowning in debt.

Germany’s 10-year yield rose by nearly 15 basis points (hundredths of a percent) today. Clearly this is not a big move in absolute terms, and it still leaves the yield level at close to 2.1%, while the euro’s currency value fell by a little over 1% versus the US dollar, again nothing drastic. But this event could prove to be a turning point for the euro system because it can be seen as a clear warning to the German government.

Current euro area policies are evidently not working to resolve the troubles of highly indebted countries like Greece and Italy, but they may also now begin to impact Germany itself. One other indication is that since the summer, the cost of insuring against a German government default over the next five years has risen from relatively negligible levels of around 40 basis points – a level in place since 2010 - to close to 100 basis points. However inaccurate, biased or irrelevant you may think Credit Default Swap insurance prices are, they are now two and a half times higher than before, a fact that will not have escaped the German authorities.

This trend cannot persist, and at some stage in the coming three-to-six months it is likely to provoke a reaction.[1] If Germany stays as the implicit guarantor of the euro, but does nothing to formalise this position through an explicit political commitment, then it will face a euro crisis that will get steadily worse, both for other member states and, more importantly, for itself. So it must either explicitly ‘opt out’ of the euro commitment, which means risking the break up of a political and economic project from which it has benefited greatly in the past two decades, and to which it still proclaims commitment, or it must agree to some version of euro-wide bond guarantees or financing by member governments. So far, the euro policy hierarchy has made laughable suggestions of leveraging the funds of the European Financial Stability Facility, when the EFSF itself cannot borrow in the market and the scale of its funds, even after the proposed leveraging operation that remains imaginary, will prove inadequate. The reason for the prominence of technocrats at all levels of euro politics is that the key politicians have not made, and perhaps cannot make, a decision.

One interesting crisis that may be on the near horizon concerns the European Central Bank. So far, the ECB has bought tens of billions of euros worth of government bonds issued by Greece, Italy and other member states. This is unusual, but allowed within its existing mandate. The orthodox argument is that this is providing liquidity, or ironing out unjustified market moves, even though it acts to try to neutralise the operation of the market that forces yields higher. The ultimate sin that the ECB has not yet committed, and which goes against the current rules, is to buy bonds directly from governments. Its purchases have been in the ‘secondary market’, ie after the bonds have already been sold. If the ECB moves to buy bonds directly from governments, for example by taking part in government bond auctions, then that will be monetising debt – creating money to pay for government deficits. Such a move is under way already by the US Fed and the Bank of England, with limited controls so that the pretence can be made that it is not really (much) monetisation. It is hard to see Germany allowing this option, but who knows, if push comes to shove, and the next few Bund auctions do not attract enough buyers?[2]

Tony Norfield, 23 November 2011

[1] I say 3-6 months because things are happening so quickly that what you think could take up to several years of agonising will probably occur much faster! From a market point of view, there are pressure points that usually occur in the lead up to year-end (ie now) and also in February-March, when a wide range of companies and various financial institutions make their forecasts and business decisions for hedging and investment. Two of those trigger points are within the next six months.
[2] The usual media commentaries about a German phobia of inflation always relate back to the post-World War 1 hyperinflation. I have found this implausible. The fact remains that the hyperinflation period was in the early 1920s, so anyone alive now (not many!) who actually remembers that is probably around 100 years old. This is not a plausible national memory for today, despite there being some German museums (always covered in TV explanations) that illustrate the ‘wheel-barrow’ money of the time. An important, and more recent bout of inflation that never gets much attention is the inflationary Nazi policy during WW2 that was one factor behind the replacement of the Reichsmark in 1948. Or perhaps the German anti-inflation sentiment is a result of the austerity and low incomes of the first decade or so after 1945 – with the view that higher prices would drive real incomes lower still? Any views or information on this would be welcome!

Tuesday, 8 November 2011

Law of Value versus Berlusconi, Papandreou

The calculations of European politicians have come unstuck. Political favours, patronage, trusted allies and deals that worked to produce results in the past now do not work at all. The evolution of the crisis says: ‘You have no more money’. That is the simple message that has led to the resignations of Berlusconi, imperious clown of Italy, and Papandreou, dynastic head of Greece.

As previous articles on this blog have shown, things are getting worse.[1] The impact on Europe has hit the headlines most in recent weeks, with the media focus on rising bond yields, reflecting the lack of credibility that governments have in resolving the crisis. Even the European Financial Stability Facility (the more words, the less content) faces rising yields, leading to a situation where, as one market analyst put it, “the vehicle that’s supposed to borrow on behalf of countries that can’t borrow, can’t borrow.”[2] Read that two or more times, and you will get the idea. How the EFSF is meant to leverage its remaining funds to €1000bn in this situation I will leave to the geniuses of financial engineering.

The capitalist solution to the crisis involves a wholesale destruction of conventional living standards, and more besides. There are no solutions that any political party in crisis-stricken countries can propose that will get widespread support, but the destruction will get under way in any case. More Italians may hate Berlusconi now, but his exit will do nothing to resolve Italy’s problems. The resolution implies austerity, and no reduction in Italian bond yields based on his demise will prevent that. The same thing applies to Greece, which seems to have stepped back from the brink of what may have been an even bigger shock to its living standards – leaving the euro – than is now going to happen, minus Papandreou.[3]

The main European imperial powers, Germany and France, have their own reckoning to ponder. Busy trying to maintain the system they built, they have found their own finances under threat, as reflected in the weakened position of the EFSF, Sarkozy’s worries about French banks and Merkel’s troubles in the Bundestag. ‘Merkozy’ can deliberate, but the capitalist market decides. That is what the Law of Value is all about.

Tony Norfield, 8 November 2011

[1] See ‘It Can Always Get Worse’, 22 September 2011.
[2] See Lex Column, Financial Times, 3 November 2011.
[3] In my view, the costs for Greece of leaving the euro are huge. There are no historical examples of leaving a currency system after having given up the domestic currency and having spent a decade writing commercial contracts in a joint currency. The banking system may collapse within the euro system; it would definitely collapse outside of it.

Tuesday, 1 November 2011

Historical Materialism 8th annual conference, London 10-13 November 2011

In two weeks' time, the Historical Materialism journal will hold its 8th annual conference in central London. It will run over the course of four days, from Thursday 10 November to Sunday 13 November, with a large number of presentations by a wide variety of speakers, mostly from outside the UK. There are over 120 different sessions spread over the four days.


I will be presenting 'The Economics of British Imperialism' in one of the sessions on 'Forms of capitalist power', on Friday 11th at 14.15-16.00 in Room B102, on the 1st floor of the Brunei Gallery building in Thornhaugh Street WC1. (This timetable is provisional and may be changed again!)

The Provisional Programme is online at:

To register in advance and benefit from a reduction go to:
Advanced booking will stop on Monday 7 November
Tony Norfield 

Monday, 24 October 2011

British Imperialism Today

For most commentators, British imperialism is a matter for the history books. It is neither polite, nor, it would seem, in the least accurate, to label Britain today as an imperialist power. Yes, there were the days of empire and colonies, they will argue. But apart from a few hangovers from the imperial past like Northern Ireland, and a string of tax havens around the world whose anthem is ‘God save the Queen’, like Gibraltar, Bermuda and the Bahamas (and many others), surely the ‘imperialist’ label is just a term of abuse with no real content in present day reality? After all, Britain now presides over a voluntary Commonwealth of 54 countries, not an empire.

However, this is to look at the form, not the content, of imperialism. Even in the colonial era, it was not always necessary to exercise domination through direct political control. The economic content of imperialism, a focus of this blog, is how the major powers derive economic privileges from their position in the global economy. This may be through violence and intimidation: do what we tell you, or else. But it can also be through other forms of exercising power to ensure the economic privileges are realised. As explained in the first article on this blog, The Economics of British Imperialism, 22 May 2011, the economic lifeblood of British imperialism today comes from earnings on direct capital investments overseas and from the UK-based global banking system, in its role as the broker for global capitalism. It is this that makes the UK more than usually prone to go to war, or at least to interfere in other countries’ business.

In this context, it was interesting to read a comment last month from a frank Labour imperialist, Lord West, the former First Sea Lord (2002-2006) under the previous Labour Government and later Prime Minister Gordon Brown’s Security Advisor. In words that rang with pride in Britain’s imperial status, and annoyance at anyone who considered Britain to be second rate, he said:

“This business of a second-tier power - we are probably, depending on what figures you use, the fifth or sixth wealthiest nation in the world.

“We have the largest percentage of our GDP on exports, apart from the tiny countries around the world, we run world shipping from the UK, we are the largest European investor in south Asia, south east Asia (and) the Pacific Rim, so our money and our wealth depends on this global scene.

“We are a permanent member of the (United Nations) Security Council and I think that gives us certain clout and certain ability.

“These mean we are not a second-tier power. We are not bloody Denmark or Belgium, and if we try to become that, I think we would be worse-off as a result.” Daily Telegraph, 22 September 2011

This is basically true, and the insults for ‘bloody Denmark or Belgium’ come naturally from one who thinks British imperialism is not always given its deserved status. Lord West fought for Britain against Argentina in the 1982 war over the Malvinas, and is less inclined to adopt the euphemisms of politicians.

Tony Norfield, 24 October 2011

Friday, 21 October 2011

Capitalism & Slavery

This is just a note on a web source I have just come across that has freely available digital copies of some important books, the Universal Library.

The 'book of the month' I would choose from this source is Eric Williams's Capitalism and Slavery, first published in 1944 and quite difficult to get from bookshops. It is a classic text that explains both the mechanism of slavery for capitalism through the example of the Caribbean slave trade, and the context for the moves to abolish slavery (first the slave trade, then, much later, slavery itself) in the British Empire in the 19th century.

I referred to this text in my book review of The Sugar Barons, 4 August 2011 on this blog, and am pleased now to have found it on the web (I wasn't looking before, since I had the book!).

Here is the link:


Friday, 7 October 2011

Steve Jobs: Apple Monopolist

The death of Steve Jobs, co-founder and latterly chairman of Apple, has brought many comments on his creative vision, skills and innovation in the field of consumer electronics. US President Obama’s tribute said that “Steve was among the greatest of American innovators – brave enough to think differently, bold enough to believe he could change the world, and talented enough to do it”. Like many other people, I am a user of a Jobs-inspired gadget that has a design that looked more attractive and useful than its rivals in the market. But I am less inclined to write a glowing obituary.

If Jobs was the genius to create popular, innovative products, then he also made sure that this was done in a way that ensured monopoly profits. Not only in getting these produced at minuscule costs on the backs of exploited Asian workers, but also in building into all of the product designs technology barriers that would protect the commercial interests of Apple and limit the options for consumers – unless they paid a lot more for not much. He made full use of the marketing notion invented by another monopolist: Apple’s products are ‘reassuringly expensive’.

I was also somewhat surprised to learn, when seeing an Apple Mac getting fixed in an IT shop, that there was a message inside the box that had instructions along the lines of: (a) you undertake not to use this device to send out signals that could be disruptive (OK, fair enough), and (b) you must not obstruct any signals coming into this device (Which signals exactly? Surely not from the government?).

Jobs’ real legacy should be to make us think what price society pays when good design ideas become weapons of monopoly capital.

Tony Norfield (owner of a 2GB iPod), 6 October 2011

Wednesday, 5 October 2011

Dimensions of Dollar Imperialism

The US has long been thought to enjoy an ‘exorbitant privilege’ based on the dollar’s role as the major global currency.[1] This article looks at the different elements of the dollar privilege and how these work, not only in ‘normal’ times but, especially, in the current crisis.

1. Global role of the dollar

All paper currencies are so-called ‘fiat’ currencies, with a value set by the governments that issue them, not by their intrinsic value. Currency notes cost a few cents each to produce, so their much higher nominal value and buying power of $1, $5, $20, $100, etc, is based upon an established system of commercial law that means they can be exchanged for goods up to the same price. As long as the power of the state is unquestioned, at least in this regard, then there is no need to waste resources producing currency that has an intrinsic value in line with its nominal value. In other words, there is no need to have a $20 bill that actually costs $20 to make. This works well within the national boundaries of the state, which are usually the limits for the national fiat currency being legal tender.
But why then should a European, Asian, Latin American or African country accept dollar payments for their products when they are outside the national territory of the US? The dollar payments will not even necessarily be in the form of paper bills, and may only be a credit registered in a bank account. The reason for the dollar’s acceptability is US economic and political power. The US established a system of global finance after 1945 that was dollar-based, and the US was, and still is, the largest economy in the world. [2]
US pre-eminence is diminishing, but the institutions of US power remain in place and have so far faced little challenge. In foreign exchange trading, for example, the US dollar was on one side of 85% of all global currency deals in 2010, despite the alternative of the euro.[3] Important commodity prices are quoted, and contracts are set, in terms of US dollars, from oil to agricultural products and metals, and this phenomenon also applies to major industrial goods such as aircraft, components for electronics products, military equipment and the products of other many other industries traded internationally.[4] In financial securities markets, the US also stands out as the biggest in the world. The New York Stock Exchange is the largest equity market, by market capitalisation, and the US is also home to the world’s largest bond market.[5]
So the US currency has a global role based on US power. The sections below spell out what advantages the US gains from this.

2. Dollar seigniorage

The simplest form of advantage for the US, and also the least important, is that of ‘seigniorage’. The term describes the profit that a government can make by printing money with an exchange value higher than its cost of production, as in the printing of denominations of dollar bills mentioned above. All governments printing money that will be accepted within their national boundaries have this advantage, but the US has a particular advantage because the dollar is also accepted in many foreign countries. Especially when the local currency is seen as being unstable, for example when there is a risk of very high inflation rates, then companies and ordinary people may hold US dollars as their ‘store of value’. They are holding bits of paper that cost a few cents each to produce but which may have a legal tender value of many thousands of dollars. If the dollars have entered circulation in the country through the cash payment for that country’s exports, then the US has exchanged its green bits of paper for that country’s resources.
It is obviously difficult to measure with any precision the value to the US of international seigniorage, and estimates vary widely, but it is thought that a stock of perhaps $300-600bn of US currency is circulating overseas, an amount that rises every year.[6] A proportion of this will be money used in drug deals and other illegal activities, but the effect is to deliver the US economy a sizeable benefit. In some manner, foreigners have delivered the US the goods that it wants, whatever these may be, and many of the providers have held onto the cash.

3. Cheaper dollar finance

Seigniorage is nevertheless only a very narrow conception of the advantages that the US gains from the role of the dollar. Most users of the dollar in international trade and finance do not hold the cash in their hands, but in a bank account or in the form of US dollar financial securities (titles of ownership to US assets, such as equities or bonds). With these, the holders receive interest or dividend payments, so the US does not receive the funds for free. But a key benefit of the global role of the US dollar is to get cheap, low risk finance. This comes about in two ways.
Firstly, through the fact that the US can draw upon the financial resources of the world economy, so it has much easier access to funds than do other countries. One important aspect of this has been the dollar’s high share – around two-thirds - of official foreign exchange reserves. After the Asian financial crisis of 1997-98, many countries in the region – and elsewhere – built up their currency reserves as a means of economic insurance against renewed trouble.[7] The US dollar was the currency of choice for these reserves, as the major means of payment for international goods and global finance. So it was that through the 2000s, a growing US current account deficit was funded by huge inflows of finance, especially from Asian central banks that bought US Treasury securities and other US dollar-denominated assets. One study suggested that the impact of these purchases of dollar securities was to reduce the borrowing costs of the US government by as much as 150 basis points (or 1.5%) for 10-year debt, compared to what the cost might otherwise have been.[8]
Secondly, by issuing debt in terms of dollars, the US can avoid taking on foreign currency risk. In a US-centred crisis, the value of the dollar might fall against other major currencies, but that does not matter if the US has little or no debt denominated in euros, yen or sterling. Countries that do not have such a privileged position in global finance – those that are not imperialist powers - are usually forced to borrow in the major foreign currencies and suffer the full consequences when a crisis hits.
This cheap, low risk finance cuts the cost of funding the large US trade deficit. It also enables the US to generate more earnings on its foreign investments than foreigners do on their investments in the US. This is despite the fact that the value of US overseas assets is far less than the value of assets that foreign investors own in the US. In 2010, US net foreign investment income amounted to a massive $171bn.[9]

4. US benefits in a crisis

The US government controls the world’s major currency with by far the biggest impact on international trading and financial transactions, even if these deals do not involve the US economy or US companies. Deals that are made in US dollars need to be settled in US dollars. This is not necessarily done by getting hold of the cash bills. Much more frequently it is done by getting access to dollar finance through a banking relationship. It is here that US financial power is supreme.
A crisis disrupts business, making companies and people more vulnerable to changes in financial relationships. Perhaps a buyer cannot get access to the loan required, or a producer may not be able to finance the output that was planned. Market prices may also be pushed too low or too high by dramatic currency or commodity price moves. As doubts grow regarding who can survive the crisis, having access to credit is indispensable. The Federal Reserve, the US central bank, is in charge of this for much of the world economy given the role of the dollar, and access to financial support from the Fed counts.
In recent years, many central bank authorities have had to bail out their domestic banking systems, but the Fed has played a much bigger role. It has provided extra funds, for a fee, to foreign banks in the US – especially the European ones. It has also provided extra dollar liquidity, also for a premium fee, to the European Central Bank to distribute to euro-based banks, the latest in mid-September. The New York Times reported on why this move was in US interests:
“In recent days some European banks have faced difficulties in borrowing dollars, whether from other banks or from money market funds in the United States. There was fear that if they could not borrow dollars, they would be forced to cut off loans to American companies or sell dollar-denominated assets, perhaps forcing prices down in already unsteady markets.”[10]
This vulnerability of European banks – despite the protection they get from the ECB – is based on the fact that much of their business is conducted in dollars, a currency that only the US can print, and of which the US controls the supply. So far, the fear of economic collapse and the contagion from it has led to cooperation between the major powers. But the role of the dollar in pricing aerospace products and other international commodities means that it is critical for non-US banks to be able to access dollar funds, and the cooperation seen so far from the US need not be as easily available in future. Le Monde has already complained that the US Fed was making non-US banks in America file non-US assets as security, even if they were not actually borrowing any dollar funds from the Fed. [11] The complaint was rather confused, but reflects the fact that, even in a crisis, the US is in a privileged position to set the rules when it comes to finance.

5. Imperial power and the dollar

Declining US economic power is offset to an important extent by the continued prominence of the US in global finance. As has been shown, the US is able to borrow in its own currency at low interest rates, and it can readily attract funds based on the huge size and liquidity of dollar financial markets, given the global role of the US dollar. Even the US credit rating downgrade in August did not dent this. It is the dollar’s global role based on the continuing power of US imperialism that makes the US a ‘safe haven’ for financial markets, even when the American economy is in crisis.
Of course, US financial institutions have also been hit by the economic crisis. The US government has organised shotgun marriages of several major banks and many smaller banks have gone bust in recent years. But the US financial system remains in a privileged position in the world economy, as a purveyor of the major currency, backed by the world’s principal central banking authority - the one that controls the tap of global credit and liquidity.[12]
Despite the attacks currently taking place on the living standards of the broad population in the US, it is suffering far less than the countries that were overwhelmed by major financial and economic crises in the past couple of decades, from Mexico, Brazil and Argentina to South Korea, Indonesia and Thailand. The record levels of US debt and borrowing have seen no imposition of austerity policies by the IMF, and the US has faced no sudden halt in its access to foreign capital as many other countries have, not least Ireland and Greece.[13] Such are the benefits of being the major imperialist power in the global economy. This is why the US will struggle to ensure that its dominant position, and that of the dollar, remains unchallenged.

Tony Norfield, 5 October 2011

[1] The term dates back to the 1960s and was coined by Valéry Giscard d'Estaing, when he was a France’s minister of finance. A useful recent book on this question is Barry Eichengreen’s Exorbitant Privilege: The Rise and Fall of the Dollar, Oxford University Press, 2011.
[2] China is likely within the next few years to become the world’s largest economy, overtaking the US. Note that this article only looks at some of the economic and financial aspects of US power, not the military dimension.
[3] Figures taken from BIS, Triennial Central Bank Survey, Report on global foreign exchange market activity in 2010, December 2010. The dollar share was 84.9% and the euro’s 39.1%. Note that here the total is 200%, since there are two sides to all currency trades, but the US dollar’s share was still more than twice that of the euro.
[4] The dollar is the most used currency for all kinds of international transaction, and the currency with the broadest global spread of use. Although the euro has gained acceptability since its inception in 1999, a large part of its use is in Europe and surrounding countries. The euro has been a serious challenger to the US dollar as an alternative currency in which to denominate bond issues, etc, but its market share has always remained a significant margin below that of the dollar. See The International Role of the Euro, European Central Bank, July 2011, for details.
[5] The US is second to the UK as a national base for the global foreign exchange market, but the currency trading in the UK is mainly of non-sterling currencies, and especially dollars.
[6] At the time of the opening up of Central and Eastern Europe and the former Soviet Union to capitalism after 1989, their trade with the US was minuscule, but the dollar played a major role in their economies on the black market. The Deutsche mark had, by contrast, very little penetration, despite Germany’s stronger position in trade with these countries.
[7] The 1997-98 crisis was traumatic for many countries in the Asian region. They suffered collapsing currencies, a slump in living standards and found their national economic policies dominated by the IMF, whose program for ‘reform’ included the sale of domestic assets at low prices to foreign capital. Thailand, South Korea and Indonesia were among the worst affected in this regard, and China, the major accumulator of foreign exchange reserves in the 2000s, took note.
[8] For example, the 10-year US Treasury yield was as low as 4.5%, rather than 6.0%. See Francis E Warnock and Veronica C Warnock, ‘International Capital Flows and US Interest Rates’, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 840, September 2005. Notably, the US restricts the foreign purchase of US corporations if this might seem to be against the national interest, but it has no qualms about taking money from whichever country wants to buy US debt (at low yields). Thus China was prevented from buying US oil major Unocal, but it has been allowed to own a mountain of US Treasuries.
[9] The US shares this advantage with the UK. See ‘The Real US Debt Problem’, 26 July 2011, and ‘The Economics of British Imperialism’, 22 May 2011, on this blog for more details.
[10] New York Times, 15 September 2011.
[11] ‘Comment la Fed assèche les banques européennes’ (‘How the Fed squeezes European banks’), Le Monde, 23 September 2011.
[12] US banks are still among the biggest in the world in terms of global coverage and influence, and US power also extends beyond purely US banks. For example, American nationals working for non-US banks outside the US are still subject to US law, so they cannot deal with any country that the US declares out of bounds. This is a factor that has strengthened the impact of US sanctions on Iran, for example.
[13] The IMF is technically an international body, but runs largely according to US dictates. The US does not need to own it all. It accounts for a significant minority of the votes (17%), well ahead of the second largest country, Japan, with just 6%, and has enough influence over other members to ensure that IMF policies suit its interests.

Thursday, 22 September 2011

It Can Always Get Worse …

The IMF recently issued its World Economic Outlook, a document that has the advantage of comparing trends across the global economy. Although the text is written in international policy bureaucrat newspeak, luckily the charts and tables more or less speak for themselves. Below I have copied some of the more salient figures to illustrate how the crisis has recently intensified in the major capitalist economies. In addition, I note some points from recent press reports that illustrate how trouble is also brewing below the surface.

Economic stagnation after the failure of stimulus policies

The first chart shows the economic cycle based on data from purchasing manager surveys. These surveys track the broad economy closely, and the reports are released more promptly than official GDP statistics. The 50 level for the index in the chart means no change in output; above 50 means growth, below means contraction. After collapsing in 2008, global output growth resumed from mid-2009, but now economies have dropped back towards stagnation. In general, the ‘advanced’ economies are doing worse than the ‘emerging’ economies, partly because the latter did not take on as much crippling debt.[1]

The basic message from this chart is that all the extreme policy measures enacted since 2008 to boost the global economy – huge budget deficits, the public sector taking on private sector liabilities, zero interest rates, etc - have failed to restore conditions for profitable capital accumulation and growth.

The latest policy innovation from the US Federal Reserve has not changed anything, and global equity prices dropped by 3-5% today.[2] The IMF itself is left asking governments that have low borrowing rates to borrow more and spend more to boost demand in the global economy. But these same countries are afraid that more borrowing may find them also on the road to financial ruin.

The view from the end of the road

That road does not look attractive. This is shown in another chart from the IMF report, depicting the extra amount of interest over Germany’s that governments in the euro area pay to borrow for two years. As can be seen from the left hand section of the chart, the curve for Greece moved towards 8000. This means the market was demanding it paid an astonishing 80% per annum more than Germany! (Today it was much lower, a mere 65% premium!) Less extreme are Portugal and Ireland, but an extra 10-15% is still catastrophic, even if it is not as surreal. On the right hand section of the chart, the scale of premium borrowing rates is far less for the stronger countries (an extra 0-5%), but Italy, Spain and Belgium stand out as under pressure from credit markets.

Germany clearly remains in the best position: the German government can borrow for 10 years at a rate of just 1.7%. However, it will be wary of spending to try and boost the global economy when it is widely seen as liable for bailing out indebted euro members.

Behind the scenes

All this looks bad, but behind the startling pictures things are actually worse. Take for example, Siemens. Last year the German industrial group set up its own bank, partly because it would then have more financial flexibility and partly because it was worried about the other (mainly European) banks with which it dealt. A few weeks ago it withdrew €500m from a French bank and added to the €4-6bn deposits that it holds directly with the European Central Bank.[3] This company’s concern is not exceptional, in fact European banks face serious problems getting cash from their counterparts in the money markets.

This is shown by the wider ‘spreads’ that European banks are paying for funds. The credit risk of lending to them has risen, so that if they can get any cash at all, they have to pay more to borrow. French banks are seen as the most at risk among the major European countries, given their exposure to Greece and other indebted countries, although they are far from being the only ones. Senior executives from BNP Paribas are currently on their way to tour the Middle East to try and drum up friendly investments from local potentates.

Safe havens?

In the latest phase of the crisis, the US dollar has strengthened against most other major currencies. This is not because the US is a ‘safe haven’ in troubled times, even though it has more weapons than anybody else, but because, for now, it may look in better shape than crisis-stricken Europe. The definition of safety in capitalist economic terms is a movable feast, depending on where next the focus of panic falls. This is difficult to forecast, especially because the cracks in the system are manifold.

Another recent IMF publication, its Global Financial Stability Report, has a useful colour-coded review of the crumbling structure of the major capitalist economies. This is shown in the next chart (you may have to increase the viewing size to see the numbers clearly) . Red means bad; amber means not good, green means OK, and possibly good, or at least better (white means no data available).

The data are percentages of 2011 GDP, except for bank leverage that is the ratio of bank assets to bank equity.[4] Most of the red boxes are on the European side, showing high levels of debt and bank leverage, principally in the suspected countries. However, disturbingly for those who think Germany is completely safe, its banks have the highest leverage in the world at 32! The US gets off relatively lightly on this assessment, with a few green boxes. But it is not clear how far the IMF ignores the huge loss potential to the government of the US Fed owning nearly a trillion dollars of mortgage assets, and its other implicit financial guarantees. Overall Germany and Canada seem to do best (though there are some gaps in the Canada assessment). Interestingly, the euro area as a whole is not so dreadful, but this is an average of a range from very bad to not bad. The UK has a mixed picture that makes it reluctant to boost spending and raise its risk level.

So, there are plenty of pressure points ready to explode as the crisis enters another phase. As the movie Airplane! might have noted, this is a bad year for capitalist policy makers to quit smoking.

Tony Norfield, 22 September 2011

[1] See the chart of the debt levels in different countries in my article ‘Debt and Austerity’, 8 August 2011, on this blog.
[2] See my article ‘Operation Twist’, 21 September 2011.
[3] See ‘Siemens shelters up to €6bn at ECB’, Financial Times, 19 September 2011.
[4] See my article ‘Bank Profits & Leverage’, 25 August 2011, for more on detail this.