For a moment this summer, it appeared that Greece had cornered its creditors. In a hotly contested vote in which their European neighbors openly intervened, Greeks overwhelmingly voted to reject more austerity.
In a controversial turnaround, however, Greek Prime Minister Alexis Tsipras then submitted to the demands of eurozone leaders for more austerity measures in return for a bailout loan of 86 billion euros. Tsipras lamented that he’d had no choice — resistance would have meant a forcible exit from the eurozone.
Humiliated and vanquished, the Greek government returned to the negotiating table to accept the surrender terms. The spectacle resembled an ISIS-style execution of a whole country — in full view of a global audience.
The final details remain to be hammered out, but there’s no doubt that the deal imposed by the Eurozone on Greece will allow Athens neither to pay off its crushing debt nor to recover from the depression it’s in now. The deal is a triumph for finance capital, but it was exacted at a terrible cost — one that will eventually boomerang on the banks, the European Union, and its enforcer, Germany.
Diagnosing the Problem
A recently revealed memo from the International Monetary Fund acknowledges that Greece urgently needs debt relief. In an earlier analysis, the fund had already admitted that it failed to anticipate the extent of the damage wrought by the austerity straitjacket Greece has been bundled in since 2010.
Gross domestic product was 25 percent lower in 2014 compared to 2008, and unemployment stands at 26 percent — with youth unemployment at a mind-numbing 52 percent.
The pension cuts, consumer tax hikes, and other draconian measures that Greeks are likely to be subjected to in the new deal will kill off any rise in domestic demand necessary for the economy to grow. The 86 billion euro bailout that Greece will be given access to will be of little help, since practically all of it — 90 percent, by some estimates — will find its way back to the European Central Bank, the International Monetary Fund, and German and French banks as debt service.
Why the German-led Eurozone imposed a Carthaginian peace on Greece will long be discussed, but it’s clear that key motives were saving the European financial elite from the consequences of their irresponsible policies, enforcing the iron principle of full debt repayment, and crucifying Greece to dissuade others — like the Spaniards, Irish, and Portuguese — from revolting against debt slavery. As Karl Otto Pöhl, a former head of Germany’s Bundesbank, admitted sometime back, the draconian exercise in Greece is about “protecting German banks, but especially the French banks, from debt write-offs.”
The subjugation of the Greeks is the latest victory notched by finance capital since it began its scorched-earth counter-offensive against forces seeking to constrain and regulate it for bringing about the financial crisis that broke in 2008. Yet its victory is likely to be Pyrrhic — an extremely costly affair that’s likely to lead to a greater disaster.
Rolling Back Regulation
Greece is only the latest episode in an ongoing pattern.
When the G-20 met in Pittsburgh in the depths of the financial maelstrom in November 2009, two measures were uppermost on the reform agenda approved by the participants. One was maintaining powerful stimulus programs to ignite economic recovery. The other was to effectively regulate the financial sector. As the G-20 Leaders’ Communique put it, “Where reckless behavior and a lack of responsibility led to crisis, we will not allow a return to banking as usual.”
Yet finance capital and its allies were able to contain both thrusts and launch a counteroffensive that made citizens pay the price for the economic mess.
In the United States, Wall Street was able to get the government in 2008 to bail out the giant institutions whose balance sheets were fatally impaired by toxic subprime assets, instead of nationalizing them. Then, in 2009 and 2010, they gutted the Dodd-Frank Wall Street Reform and Consumer Protection Act of three key items that were seen as necessary for genuine reform: downsizing the banks; institutionally separating commercial from investment banking; and banning most derivatives and regulating the shadow banking system that had brought on the crisis.
As Cornell University’s Jonathan Kirshner writes, the “Dodd Frank regulatory reforms, and provisions such as the Volcker rule, designed to restrict the types of risky investments that banks would be allowed to engage in, have not simply been watered down.” They’ve been “waterboarded into submission” by “a cascade of exceptions, exemptions, qualifications, and vague language.” He concludes, “what few teeth remain are utterly dependent for application on the (very suspect) will of regulators.”
Instrumental in securing this outcome was the $344 million the industry spent lobbying the U.S. Congress in the first nine months of 2009, when legislators were taking up financial reform. Senator Chris Dodd alone, the chairman of the Senate Banking Committee, received over $2 million in contributions from Wall Street in 2007-08.
It also helped that there were powerful voices in the new Obama administration who were sympathetic to the bankers, notably Treasury Secretary Tim Geithner and Council of Economic Advisers head Larry Summers. Both had served as close associates of Robert Rubin, who had successive incarnations as co-chairman of Goldman Sachs, Bill Clinton’s Treasury chief, and chairman and senior counselor of Citigroup. More than anyone else over the last two decades, Rubin embodies the Wall Street-Washington connection that dismantled the New Deal controls on finance capital and paved the way for the 2008 implosion.
Changing the Narrative
Finance capital not only successfully resisted effective reregulation. It was also able to change the narrative about the causes of the financial crisis, throwing the blame entirely on the state.
This is best illustrated in the case of Europe. As in the United States, the financial crisis in Europe was a supply-driven-crisis. The big European banks sought high-profit, quick-return substitutes for the low returns on investment in industry and agriculture, like real estate lending and speculation in financial derivatives, and placed their surplus funds in high-yield bonds sold by governments.
In the case of Greece, German and French private banks held some 70 percent of the country’s 290-billion euro debt at the beginning of the crisis. German banks were great buyers of the toxic subprime assets from U.S. financial institutions, and they applied the same enthusiasm to buying Greek government bonds. For their part, even as the financial crisis unfolded, French banks increased their lending to Greece by 23 percent, to Spain by 11 percent, and to Portugal by 26 percent.
Indeed, in their drive to raise more and more profits from lending to governments, local banks, and real estate developers, Europe’s banks poured $2.5 trillion into Ireland, Greece, Portugal, and Spain. It’s sometimes said that these countries’ membership in the eurozone “deceived” the banks into thinking that their loans were safe, since they’d embraced the tough rules for membership in the same currency union to which Europe’s strongest economy, Germany, belonged. More likely, however, a government’s membership in the eurozone provided the much-needed justification for unleashing the tremendous surplus funds the banks possessed that would create no profits by simply lying in the banks’ vaults.
Besieged for having plunged the world into a financial maelstrom, finance capital was desperate to change the narrative in the aftermath of the inevitable implosion. This opportunity emerged with two developments in 2009-2010.
One was the announcement in late 2009 by Dubai that it could no longer pay the debts it incurred in building its ultra-modern luxury oasis for the global elite in the Persian Gulf. Dubai’s default, analyst James Rickards notes, “became contagious, spreading to Europe and Greece in particular.” The other event, coming on the heels of the Dubai debacle, was the discovery that Greece, via complex financial deals engineered by the Wall Street firm Goldman Sachs in 2001, had fudged its debt and deficit figures in order keep within the strict rules for eurozone membership.
Greece’s debt in 2007, before the financial crisis, came to 290 billion euros, which was equivalent to 107 percent of GDP. Yet the banks showed no signs they were particularly worried about it then and continued to pour money into the country. The debt-to-GDP ratio rose to 148 percent in 2010, bringing the country to the brink of a sovereign debt crisis.
The creditors, European authorities, and the business press used the ensuing panic to focus the blame solely on unchecked government borrowing, completely suppressing the role played by irresponsible foreign creditors and the Greek private sector. Equally significant, the same forces used Greece’s crisis to popularize the idea that sovereign debt crises caused by profligate spending had also overtaken Ireland, Spain, and Portugal — though these countries had public debt-to-GDP ratios that were rather low. In the case of Spain and Ireland, they were lower than Germany’s!
Passing On the Cost
Sovereign debt is debt that a state is responsible for paying off, and this includes the bad debt incurred by the private sector from foreign banks. Ever since the debt crises of the 1980s, authorities have enforced a rule that the state must assume responsibility for debt to international creditors that cannot be repaid by its private sector.
In Spain, Ireland, and many other countries in financial turmoil, it was the deadly alliance between foreign creditors and domestic investors that brought countries to their knees, not government borrowing. As Mark Blyth writes, “sovereign debt crises are almost always ‘credit booms gone bust.’ They develop in the private sector and end up in the public sector. The causation is clear. Banking bubbles and busts cause sovereign debt crises. Period. To reverse the causation and blame the sovereign for the bond market crisis, as policy makers in Europe have repeatedly done to enable a policy of austerity that isn’t working, begs the question, why keep doing it?”
Why indeed? The answer is that this operation has promoted a strong counter-narrative about the causes of the financial crisis, where the banks are the victims while states are the villains. This narrative enables the banks to simultaneously escape haircuts for their irresponsible lending and oppose the imposition of state restraints on their activities.
The changed narrative quickly made its way to the United States, where it was used not only to derail real banking reform but to prevent the enactment of an effective stimulus program in 2010. Brandishing the image of the United States becoming like Greece if the government increased its debt load by going into deficit spending, the Republicans succeeded in bringing about an American version of the austerity programs that were imposed in Southern Europe.
Christina Romer, the head of Barack Obama’s Council of Economic Advisers, estimated that it would take a $1.8 trillion stimulus to reverse the recession. Obama approved less than half of that, $787 billion, simultaneously failing to placate the Republican opposition while preventing an early recovery. Thus the cost of the follies of Wall Street fell not on banks but on ordinary Americans, with the unemployed reaching nearly 10 percent of the work force in 2011 and youth unemployment reaching over 20 percent.
Winning the Battle, Losing the War?
Finance capital’s success in halting reform, changing the narrative of the crisis, and having the people shoulder its costs is, however, likely to be a Pyrrhic one.
The combination of deep austerity-induced recession or stagnation that grips much of Europe and the United States with the absence of financial reform is deadly. The prolonged stagnation and the prospects of deflation have discouraged investment in the real economy to expand goods and services. Thus the financial institutions have all the more reason to do what they did prior to 2008: engage in intense speculative operations designed to make super profits before gravity causes the inevitable crash.
With the move to reregulate finance halted and derivatives trading continuing unabated, the creation of new bubbles is more than likely.
The non-transparent derivatives market is now estimated to total $707 trillion, wildly higher than the $548 billion in 2008, according to analyst Jenny Walsh. “The market has grown so unfathomably vast,” she writes, “the global economy is at risk of massive damage should even a small percentage of contracts go sour. Its size and potential influence are difficult just to comprehend, let alone assess.” Former U.S. Securities and Exchange Commission Chairman Arthur Levitt, the former chairman of the SEC, agreed, telling one writer that none of the post-2008 reforms has “significantly diminished the likelihood of financial crises.”
The question then is not if another bubble will burst, but when. And when this happens, the likelihood of finance again being treated with kid’s gloves like the Dodd-Frank “reform” isn’t so assured.
The other blowback from finance capital’s current triumph is political, and it’s likely to unfold in Europe earlier than in the United States.
The melodrama unfolding in Greece is likely to heighten the strong anti-EU, anti-German, and anti-bank feelings that are coursing through Europe at this point. One can only imagine the feelings of many Europeans if the normally sedate, liberal Financial Times columnist Wolfgang Munchau is moved to write in very emotional terms:
“By forcing Alexis Tsipras into a humiliating defeat, Greece’s creditors have done a lot more than bring about regime change in Greece or endanger its relations with the eurozone. They have destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union. In doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order. The best thing that can be said of the weekend is the brutal honesty of those perpetrating this regime change.”
The question is: Who will harvest these boiling currents of resentment and anger in the European body politic?
With the radical left defeated — albeit heroically, in the fashion of Thermopylae — in the showdown between Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel, and with Social Democrats in Germany and throughout Europe reduced to being Merkel’s helpers in aggressively promoting the interests of the banks, the most likely beneficiary of the dramatic events of the last few weeks will be the surging radical right, with its anti-EU, nationalist, and populist appeal.
Not surprisingly, the anti-euro chief of France’s National Front, Marine Le Pen — who increasingly laces her speeches with anti-capitalist, anti-globalization rhetoric — took up the cudgels for Greece in the recent face off. The EU, she declared, “mocks and brushes aside the popular wish expressed in the Greek elections and it seeks to impose a policy of austerity, the continuity of a policy of austerity which the Greek people no longer want.” Posing a rhetorical question no doubt asked by many Greeks, she wondered aloud, “Confronted with the choice, who will win? Democracy or Euro-Dictatorship?”
Le Pen is not to be underestimated. “Left-wing voters are crossing the red line because they think that salvation from their plight is embodied by Madame Le Pen,” a French Socialist senator admitted to The New Statesman. “They say ‘no’ to a world that seems hard, globalized, implacable. These are working-class people, pensioners, office workers who say, ‘We don’t want this capitalism and competition in a world where Europe is losing its leadership.’”
Le Pen may become president of France in the 2017 elections. And if she does, a not unimportant contribution to her victory will have been the dramatic events of the last few weeks in Brussels and Berlin.