Dublin Opinion

I’m pretty sick of the regular news cycle talking about the Eurozone crisis, and the various bits of leaked info from the upcoming budget. Is it necessary to talk about the public sector cuts, cuts in the Welfare budget or VAT increases as if somehow there is an argument that this is being done to bring about economic recovery? What does it matter what Merkel or the EU/IMF/ECB will allow?

Here’s a quick guide to what is happening.

We are in a new episode of the global crisis: the struggle to distribute the costs of the

crisis. This crisis has been an outcome of increased exploitation and inequality, since the post-1980s across the globe. Neoliberalism tried to solve the crisis of the golden age of capitalism via a major attack on labor. The outcome was a dramatic decline in labor’s bargaining power and labor’s share in income across the globe in the post-1980s. However, the decline in the labor share has been the source of a  potential realization crisis for the system -one of the major sources of crisis in capitalism according to Marxian economics. The decline in the purchasing power of workers limited their potential to consume. Demand deficiency and financial deregulation reduced investments despite increasing profitability. Thus neoliberalism only replaced the profit squeeze and over-accumulation crisis of the 1970s with the realization problem. Financialization and debt-led consumption seemed to offer a shortterm solution to this  potential realization crisis. Since summer 2007 this solution has also collapsed. The crisis was tamed via major banking rescue packages and fiscal stimuli. Now the financial speculators and corporations are relabeling the crisis as a “sovereign debt crisis” and pressurizing the governments in diverse countries ranging from Greece to Britain to cut spending to avoid taxes on their profits and wealth.The pressure on wages associated with budget cuts is great news for the corporations! However the push for public debt reduction is the biggest threat to recovery.

The governments agreeing to the cuts are avoiding taxing the beneficiaries of neoliberal policies and the main creators of the crisis. The public debt would not be there, if it were not for the bank rescue packages, counter-cyclical fiscal stimuli, and the loss of tax revenues during the crisis. Finally, the crisis would not have happened without the major procapital redistribution and financialization.

In a recently published IMF Working Paper however, the details of this massive transfer of private debt to sovereigns, while reimbursing the collapsed debtors with real money from public revenue, which it then went on to use for further speculation, is explored in more detail - and most importantly reveals little ol Ireland’s role in this disgusting turn of events.

“In early July 2007, when the Subprime crisis was just placing the world on notice, the spread (risk premium) on the 10-year maturity Irish sovereign bond was still negative. In other words, the Irish sovereign paid a lower interest rate than did the German sovereign. Even in March 2008, when Bear Stearns was rescued-the point at which, in our view, the European banking-sovereign crisis took a decisive turn-the Irish spread was only 30 basis points.

Thereafter, spreads rose at a more rapid pace, with some ups and downs, but through the Lehman bankruptcy to the nationalization of Anglo Irish in January 2009. They had risen then to 300 basis points. That increase in a short period of 9 months seemed dramatic, but in retrospect appears quaint. As of this writing, in mid-September 2011, Irish spreads are about 650 basis points, having scaled over a 1000 basis points before retreating.

This basic sequence of striking developments played out, with varying intensities, across the eurozone. For several tranquil years-from the introduction of the euro in January 1999 to the start of the Subprime crisis in mid-July 2007-spreads on bonds of eurozone sovereigns had moved in a narrow range with only modest differentiation across countries.

The homogeneity was questionable then and became untenable as the crisis unfolded. In this paper, we tell the tale of that crisis as it unfolded in three phases:

• In the first phase, global financial stress was transmitted to Europe. Spreads of European sovereigns rose along with metrics of the health of global banks. This phase lasted from July 2007 through to the rescue of Bear Stearns in March 2008. At that point, spreads had risen modestly, but the differentiation across countries was still low.
• From Bear Stearns onwards, a distinctive European dimension of the banking crisis emerged. A sovereign’s spread responded increasingly to the weakness of its own financial sector. It was as if the sovereign’s implied debt burden was recalibrated as news became available about its financial sector’s likely claims on the public purse. This phase lasted through to January 2009, when Anglo Irish was nationalized-an Irish episode but with a European marker. The role of global developments did not disappear, with the Lehman bankruptcy raising, for example, risk premia everywhere. However, the substantial increase in spreads was now accompanied by a significant differentiation across countries.

• After Anglo Irish, the crisis evolved into its full-blown phase characterized by highly intertwined financial and sovereign shocks. Not only did financial sector stress raise sovereign spreads as before, but now sovereign weakness also transmitted to the financial sector. Although spreads declined initially after the nationalization of Anglo Irish, the subsequent march upwards was spectacular, as was the country differentiation.

Nice to know a bank that Irish citizens will be paying 85bn for and which no longer exists has made its mark. Of course the transfer itself is only part of the story. The other important side of it is the speculators who made money from this transfer, having been informed that the structure of the Eurozone itself would not support the level of debt that Anglo and the other banks imposed on the country, and who placed their bets accordingly.

The solution? Simple really. Here’s
Özlem Onara again:

Thus this is a crisis of distribution and a reversal of inequality at the expense of labor is the only real solution, which in turn connects the demands for full employment and equality with an agenda for change beyond capitalism.