Rather than calming markets and governments, Ireland induction into the IMF-EU austerity program, the second EU member after Greece, investors and politicians are more nervous today than ever. They expect Portugal to ask for bailout assistance within days, and my information is that Lisbon will receive about the same amount as Ireland. There is talk that Belgium may be next in line, a not so unexpected development given that sovereign debt is at 100% of GDP. In order to lessen the pressure for a bailout on the part of Spain and perhaps even Italy, the number 4 and number 3 countries respectively in the eurozone, in terms of GDP, EU leaders have been pressuring the peripheral EU members to seek bailout and be subjected to IMF austerity, as though the problem is entirely separate from the core EU nations; not realizing that the disease that started in the weaker countries is rapidly infecting the strong ones that have opted for a case-by-case approach to what is a euzone problem.
EU will also have to reconsider its relationship with Russia. A few years ago on a WAIS posting, I raised the question of whether Russia should join the EU and NATO. At the time, one or two people took my proposal seriously, especially since I linked it with Israel as part of the same model of integration. However, the Russians had raised the issue of joining NATO in the 1990s mostly as a way to contain NATO's expansion. At Lisbon's NATO conference in November 2010 the question is Russia's relationship to NATO going forward, with the delicate economic and geopolitical balance of power in the hands of China during this century. Ever since Peter the Great, Russia is more Western than it is Oriental. The world power structure favors Russian integration with the EU and NATO. On 25 November 2010 at a meeting with EU officials, Vladimir Putin rhetorically asked whether Russia and EU should consider integration. EU and Russia have a common destiny and they need each other, especially now that global economic contraction has left EU very vulnerable to debt crises with a contagion effect.
Realistically, I do not expect anything but more of the same case-by-case approach policies on the part of the EU dominant nations to the debt crises, until a major crisis erupts in a large economy, and it is possible that it may not come to that. However, speculators live to amass capital and they will not stop targeting vulnerable EU members, eventually hitting on the larger ones like Spain and Italy, perhaps France if this continues to go unchecked. What will the economic, political and social cost be at that point? We already know that in addition to social turmoil thus far this year across all of Europe, in mid-December there will be pan-EU labor strikes and demonstrations involving millions of people in many European cities. This despite the fact that trade union bosses have been co-opted by political parties serving in government. As I have been saying for more than a year, social unrest will intensify and it will destabilize governments. If nothing is done to address the contagion of managed bankruptcies like those of Greece and Ireland with Portugal, Belgium and Spain waiting in the wings, social upheaval on a wide scale is not so far off as most believed even a few weeks ago during the Athens and Paris strikes and demonstrations.
The EU bailout mechanism was not designed for bailing out large economies like Italy and Spain, so it does not have the necessary funding for that purpose. Spanish Prime Minister Jose Luis Rodriguez Zapatero denied that Madrid will ask for bailout funds and go under IMF-EU austerity like Greece and Ireland. Zapatero hopes Portugal follows that road so his country avoids it. About a year ago when the debt contagion started, the CEO of a major Spanish bank argued that comparing Spain to Greece is like comparing the world-class soccer team Real Madrid with some third-rate ball club. Today, everyone is drowning in the same soccer field of mounting public debt, and the faster that EU leaders realize it the better it will be for the EU as a whole and the lower and middle classes paying for this crisis. The EU debt-crisis domino effect is a reality as reflected by higher bond rates. Finance Minister Elena Salgado assured the public and investors, mostly German that provide the largest portion of bailout funding, that Madrid's austerity measures and reforms are on track and Spain does not need bailout funding. Spain claims that if necessary, it can raise funding internally, so that it would not go under IMF-EU austerity.
Silvio Berlusconi's Italy goes even farther than Spain to claim that it is immune from the public debt domino effect now sweeping across the eurozone. But Italy's public debt currently more than 1.85 trillion euros ($2.5 trillion) - one of the highest in the world after Japan and US - and rising, cannot be serviced in the absence of steady growth. In fact. Italy's situation seems much closer to that of Greece, Ireland, Portugal, and Spain than it does of Germany. Like the weaker EU members, Italy too relies inordinately on small businesses to keep the economy moving. Of course Italy, unlike Ireland, and closer to Portugal and Greece, has a solid banking sector. However, its growth rate has slowed to 0.2 percent in the third quarter and public debt hit a new high. Italy's problem is complicated by Berlusconi, the billionaire playboy leader who is immersed in corruption and faces growing opposition from his otherwise divided centrist and leftist opponents as well as the Catholic Church that can no longer give its blessing to an old man chasing teenage call girls.
Bond speculators whose job is to target weak countries and drive interest rates higher after assessing risk, will not stop until there is an EU-wide policy that puts an end to the problem at its root. What is the solution to the contagion public debt crisis facing Europe? As a creditor nation with the EU's strongest economy planning to remain globally competitive with Japan, China, and US, Germany wants a strong currency, thus it backs rigid austerity measures for EU members that have violated Maastritch Treaty rules of sustaining annual public debt above 3% annually. Angela Merkel sees the weaker EU members undercutting Germany's current competitiveness and debilitating the common reserve currency. Some Germans believe they would have been better off keeping their own currency and not pushing for a European monetary Union; a good thing when the world economy is growing a very bad thing when it is contracting. There are those who advocate a euro for the northwestern EU members, a sort of 'Nordic-uber-euro' v. a southern European 'PIIGS-euro' for Europe's debtor slackers. That millions of hard-working people who had no role in causing the public debt crisis that financial capitalism precipitated is not at issue for Germany, any more than it is for the rest of Europe's leaders that expect workers and the middle class to pay for the abuses of the financial system that concentrated wealth in the hands of a few people who should be in prison and their wealth confiscated. Instead, we have austerity measures that cut into living standards and are the cause for the massive student demonstrations in England and Italy, and labor strikes and demonstrations in Portugal, Spain and Greece.
IRELAND AUSTERITY MEASURES
- Corporation tax rate unchanged at 12.5%.
- 10bn euros (£2.5bn) of spending cuts between 2011-2014, and 5bn euros in tax rises.
- Minimum wage to be cut by one euro to 7.65 euros per hour.
- 3bn euros of cuts in public investment by 2014.
- 2.8bn euros of welfare cuts by 2014, returning spending to 2007 levels.
- Reduction of public sector pay bill by 1.2bn euros by 2014.
- Reform public sector pensions for new entrants and cut their pay by 10%.
- 24,750 cut in public sector jobs, back to 2005 level.
- VAT up from 21% to 22% in 2013, then 23% in 2014.
- Raise an extra 1.9bn euros from income tax.
- Abolition of some tax reliefs worth 755m euros.
The question is whether this latest round of austerity will amount to anything, unless there is massive capital investment for development that stimulates job growth and of course mass consumption. My view is that Ireland along with the rest of the peripheral EU members will not emerge from their predicament of 'managed bankruptcy' as I have baptized it, and as we now know the German government (11 November 2010 memo) also calls it. On the contrary, IMF austerity retards economic development and it raises debt much higher causing cyclical debt crises and permanent low living standards. There is a solution to the EU contagion of debt crises and managed bankruptcy; there is a solution that would be to the benefit of all Europe, but I doubt it will ever be considered simply because finance capital would be adamantly against it and politicians serving fiance capital lack the strength to impose it. The solution is a European Recovery Program - like the massive program that the US launched under the name Marshall Plan during the Truman administration. I first wrote about this on WAIS right after Lehman Brothers declared bankruptcy. I now believe that the time has come to at least examine the pro-and-con aspects of such a program, even as an exercise that may lead the debate to a solution other than the current IMF-EU austerity program.
The US after the war ended tried bilateral loans, but it could not stimulate the economies of its European trading partners, as exports to Europe were falling every year in the second half of the 1940s. President Truman, an otherwise much more conservative Democrat than FDR, had no choice but to launch the Marshall Plan as a solution to revive Europe so it could trade with the US and remain a strong partner in all aspects. The Marshall Plan actually helped the US as much if not much more than it did Europe. Ireland, Greece, Portugal, Belgium, Spain and Italy cannot consume the products of northwest Europe which dominates the markets of the weaker members if the latter are spending an inordinate percentage of their capital to service public debt. The US also cannot sell its products to countries whose consumption power is cut drastically because the state is amassing capital to pay bondholders. I have already stated that debt forgiveness as part of debt restructuring is inevitable for EU debtor nations, assuming the contagion continues. However, in the absence of development capital partial debt forgiveness and restructuring are not sufficient. A Marshall Plan within the eurozone that includes debt forgiveness and debt restructuring is unthinkable at this point to mainstream politicians who represent finance capital and who expect workers and the middle class to bail out banks. But it will not be unthinkable if Spain and/or Italy come close to seeking bailout funding. At that juncture, the EU will be at a crossroads and we will have to wait and see what Germany decides is in its best long-term interest.
EU will also have to reconsider its relationship with Russia. A few years ago on a WAIS posting, I raised the question of whether Russia should join the EU and NATO. At the time, one or two people took my proposal seriously, especially since I linked it with Israel as part of the same model of integration. However, the Russians had raised the issue of joining NATO in the 1990s mostly as a way to contain NATO's expansion. At Lisbon's NATO conference in November 2010 the question is Russia's relationship to NATO going forward, with the delicate economic and geopolitical balance of power in the hands of China during this century. Ever since Peter the Great, Russia is more Western than it is Oriental. The world power structure favors Russian integration with the EU and NATO. On 25 November 2010 at a meeting with EU officials, Vladimir Putin rhetorically asked whether Russia and EU should consider integration. EU and Russia have a common destiny and they need each other, especially now that global economic contraction has left EU very vulnerable to debt crises with a contagion effect.
Realistically, I do not expect anything but more of the same case-by-case approach policies on the part of the EU dominant nations to the debt crises, until a major crisis erupts in a large economy, and it is possible that it may not come to that. However, speculators live to amass capital and they will not stop targeting vulnerable EU members, eventually hitting on the larger ones like Spain and Italy, perhaps France if this continues to go unchecked. What will the economic, political and social cost be at that point? We already know that in addition to social turmoil thus far this year across all of Europe, in mid-December there will be pan-EU labor strikes and demonstrations involving millions of people in many European cities. This despite the fact that trade union bosses have been co-opted by political parties serving in government. As I have been saying for more than a year, social unrest will intensify and it will destabilize governments. If nothing is done to address the contagion of managed bankruptcies like those of Greece and Ireland with Portugal, Belgium and Spain waiting in the wings, social upheaval on a wide scale is not so far off as most believed even a few weeks ago during the Athens and Paris strikes and demonstrations.
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