Europe faces a protracted period of austerity, with major
contractions in output, consumption and employment. The crisis has
started with the smaller, more vulnerable economies like Greece,
Portugal and Ireland. But the others will follow, starting with
Britain. Alan Woods continues his analysis of the growing crisis in Europe. Click here to read part one and click here to read part two.
Europe faced with a downward spiral
Some crises can be solved with reforms, which do not go beyond the
established limits. This is above all the case after a long period of
economic growth when capitalism has accumulated a layer of fat. It can
use its accumulated reserves to prevent the crisis from developing into
a deep slump.
In the recent crisis, the ruling classes of the world, beginning
with the USA, was frightened at the social and political effects of a
slump, and took extraordinary measures to prevent it. From the
standpoint of orthodox capitalist economics these measures were
These measures had a certain effect, but did not solve anything
fundamental. On the contrary, the huge levels of government debt caused
by the bail-outs are a finished recipe for new and even more severe
crises of an economic, social and political character.
Long ago Ted Grant predicted that in the event of a deep crisis, the
bourgeoisie would use their accumulated reserves, and this is just what
has happened. Over a period of more than half a century the capitalists
have accumulated a layer of fat that could be used to prevent a deep
slump from taking hold. But these reserves are rapidly being used up,
and now the governments of the western world have been obliged to
resort to the policy of deficit financing to prevent a total collapse.
The result has been the creation of new and insoluble contradictions in
the form of deficits that have no historic precedent in peacetime.
In the period following World War Two, in 1945-7, the USA financed
European capitalism to the tune of $200 billion (in modern money). But
in the first two years of the present crisis, the US government
underwrote the banking system by $800 billion, and Britain (a far
smaller economy) handed over $400 billion – twice the total amount of
Marshall Aid. This situation cannot be sustained. The options of the
ruling class are severely limited. Interest rates are close to zero,
and cannot be further reduced to stimulate borrowing.
The huge debts left over from the previous period still have to be
repaid, which will inhibit consumption and slow the recovery in Europe
and worldwide. The recourse to “quantitative easing” is a desperate
measure, which, if it continues, will lead to a combination of
stagnation and inflation (“stagflation”). Thus, the capitalists will
end up with the worst of all worlds.
The viability of the “rescue” package launched by the bourgeoisie in
Europe depends on the implementation of brutal austerity measures.
Failure to carry these out could lead to cutting off the cash, which is
approximately the same as cutting off the vital supply lines that keep
a critically sick patient alive. Even if it the plan were to “succeed”
it would leave Greece with an intolerable public-debt burden. This
so-called rescue means years of painful austerity for the people of
Greece, without giving other countries any relief.
If there is a default in Europe, it will be accompanied by a massive
contraction of consumption, which can drag the whole world economy back
into recession. It will affect the USA and Asia. None of the
contradictions has been eliminated. A new commercial real estate crisis
is being prepared in the USA. Some say it might be due this autumn.
This involves 6.7 trillion dollar, whereas the last sub prime crisis
"only" involved 1.3 trillion. It could drag the whole financial system
down into a complete collapse.
Fears are growing of a double-dip recession. The Chinese leaders are
also worried. The Chinese spent massively to avoid recession but this
has created new and insoluble contradictions. China has built up a
colossal productive power, which cannot be absorbed by its internal
market. If demand shrinks in Europe and the USA, where are they going
to export? And since China has been the main engine of global growth as
the world struggled to emerge from recession, a sharp slowdown in China
could deal a heavy blow to the world economic recovery.
What future for Europe?
The euro and the European Union will probably survive this crisis
because the consequences of a break-up would be very serious for all.
Nevertheless, the crisis is so deep, and the confidence of the
bourgeois so shaken, that some of the bourgeois strategists are
beginning to contemplate the unthinkable. George Friedman wrote on the
intelligence website Stratfor on May 25, 2010:
“We return to the question that has defined Europe since 1871,
namely, the status of Germany in Europe. As we have seen during the
current crisis, Germany is clearly the economic center of gravity in
Europe, and this crisis has shown that the economic and the political
issues are very much one and the same. Unless Germany agrees, nothing
can be done, and if Germany so wishes, something will be done. Germany
has tremendous power in Europe, even if it is confined largely to
economic matters. But just as Germany is the blocker and enabler of
Europe, over time that makes Germany the central problem of Europe.”
If the EU were to break up, where could Germany look? The obvious
answer would seem to be France. But historically, France and Germany
have been rivals, and even in the context of the EU this rivalry
continued, with France aspiring to the political and military
leadership of Europe, consigning to Germany the economic primacy.
Unfortunately for France, economic power is always decisive in the last
France’s interests look southwards – towards the Mediterranean, the
Middle East and North Africa. Germany, by contrast, looks east – to
Central and Eastern Europe, the Balkans – and Russia. That is where
Hitler looked for Lebensraum. What he failed to do by
military means, the German capitalists hope to do by economic means. It
is not ruled out that Germany in the future will expand its contacts
with Russia, which represents a vast potential field for markets and
investments, raw materials and cheap labour. But this could only be
achieved by subordinating Germany to Russian interests. This would be
bitterly resented by Washington and the rest of Europe, especially
The unification of Europe is a necessary task if Europe is not to
enter into a path of slow and inglorious decline, as happened to
imperial Spain from the 17th century onwards. It is a
historically inevitable task, which capitalism has posed but is totally
incapable of solving. Only the Socialist United States of Europe could
succeed in radically abolishing the old frontiers and unite all of
Europe, include Russia, the Ukraine and Turkey. It would be able to
mobilize the colossal productive potential of what is, in fact,
Eurasia, uniting the vast natural resources and agriculture of Russia
and the Ukraine with the industries of Europe.
Robbing the poor to pay the rich
In 1939 the capitalists found a way out of the crisis through war.
But this avenue is now closed. There is no question of Europe waging
war against the USA, for example, or of conquering Russia (as Hitler
attempted), still less of conquering China. Europe, despite its
colossal potential, remains weak and divided, as the tiny Greek city
states were divided in Antiquity, when they ended up under the
domination of Rome.
The Marxist tendency pointed out long ago that the coming period
will be a period of wars, revolution and counterrevolution. The recent
upheavals in Iran, Kirghizstan, and Thailand, on the one hand, and
Iraq, Afghanistan and Gaza, on the other, show the correctness of this
assertion. There is colossal instability at all levels: economic,
financial, social, political and military.
For reasons we have explained, a world war is ruled out at the
present time. But there will be many small wars: wars over markets and
natural resources, especially oil. This can be a source of
international or national conflict, which inevitably leading to higher
military spending. The bourgeoisie of all nations are preparing for the
future by arming to the teeth.
Under these circumstances, the ruling classes of Europe have no
alternative but to attack the working class. For the last half century,
they bought social peace by granting reforms. But this option is no
longer available to them. From the standpoint of the capitalists, not
only can they not afford any new reforms: they cannot afford to
maintain the reforms that were won by the working class over the last
fifty years. In order to maintain their profits, they must destroy all
these reforms, which the workers have come to regard as natural.
In reality they are not natural, but the product of decades of class
struggle. It is worth remembering that democracy itself was only
achieved through a long and bitter struggle. The ruling class, which
now often speaks of its commitment to democracy, was opposed to each
and every democratic advance. And like every other gain that was won
through struggle, the democratic rights of the workers are under
threat, beginning with the most important rights: the right to strike
In the last period the capitalist system went beyond its limits. The
unbridled expansion of credit (and consequently, of debt) has pushed
world capitalism into an abyss of debt from which it is now striving to
extricate itself. But in so doing, it has created new and indissoluble
contradictions. The central contradiction is that the European working
class is now a thousand times stronger than it was in the 1930s.
The peasantry, the main social reserve of reaction, has been
practically eliminated. In Italy, Spain and Greece, the peasants were a
majority and even in France and Germany they were a sizeable force not
so long ago. Now they are a tiny minority and the working class is a
decisive majority. The workers’ organizations are intact and have not
suffered a decisive defeat since 1945. The students, who in the 1930s
were a recruiting ground for fascism, have moved to the Left and are a
now a recruiting ground for revolution, as they were in Tsarist Russia.
Given this correlation of class forces, the bourgeoisie regards the
prospect of an all-out conflict between the classes with dread. But
they have no alternative. The perspective is of a weak recovery,
accompanied by high levels of unemployment and ferocious attacks on the
living standards of the workers and middle class, the unemployed, the
old and the sick. The poorest sections of society will be compelled to
pay the bill for the crisis of capitalism. This fact, in itself, will
have profound consequences.
For a whole historical period the bourgeoisie has had to base itself
on the support of the reformist leaders of the unions and mass workers’
parties. But in the end, this basis will not be reliable. The crisis of
capitalism is also the crisis of reformism. For decades the social base
of reformism in the labour movement has been strengthened at the cost
of the revolutionary wing, which has been weakened and isolated.
Workers are practical people. If, as the reformists assured them, it
was possible to achieve what they wanted under capitalism, then why go
to all the pain and trouble of revolution?
These arguments carried weight as long as the reformists delivered
the promised results. Reformism with reforms makes sense. But reformism
without reforms, reformism with counter reforms, makes no sense at all.
This is the lesson that the Greek Prime Minister Papandreou is
learning, to his cost. The Greek workers voted massively for the Pasok
in the last elections, because they hoped that the Socialists would
protect their living standards. But the depth of the crisis of Greek
capitalism ruled this out.
Despite their intentions, Papandreou and the other leaders were
compelled to take drastic measures, not to protect the living standards
of the Greek workers and middle class, but to save Greek capitalism.
The two things are mutually exclusive.
Papandreou has promised to push through cuts totaling 45 billion
Euros to reduce the budget deficit by an unprecedented 11 percentage
points of GDP, to below the EU ceiling of 3 percent. But already there
are suggestions that the planned deficit cut of more than 20 billion
Euros in 2010 is too ambitious. In the context of an economic
contraction of about 4 percent, this is the country’s deepest recession
Deep cuts in public spending will make things worse by reducing
demand and causing a fall in tax returns. The increase in VAT and
public sector pay cuts adds up to an estimated 10 percent loss in
purchasing power. This hits small businesses hardest. About 60,000
small businesses are expected to shut down by the end of the year –
around a third of the total. This will mean less income from taxes, not
more, as the government claims.
Fuel tax increases, which have boosted the price of unleaded
gasoline by 36 percent to 1.52 Euros a liter since February, have
shrunk sales volume by up to 15 percent. On the other hand, with the
collapse of construction, Greek unemployment rose to 12.1 percent in
February, the highest monthly level on record and above an average 2010
estimate of 11.8 percent envisaged by the bailout plan. Higher
unemployment will force the government to spend more on benefits than
expected. And earnings from tourism receipts, Greece’s biggest source
of foreign currency, are set to shrink for a second consecutive year,
by up to 15 percent.
Papandreou’s chances of actually implementing his austerity policy
are therefore close to zero. In the end, no matter how much pressure is
applied on the people of Greece, they will never be able to pay their
debts. The so-called “aid” can only postpone the Day of Judgment. And
the merciless pressure from Brussels to slash living standards, and
therefore reduce demand, will only succeed in pushing Greece further
along the road to national bankruptcy and default.
The threat of a chain reaction, beginning in Greece, that could drag
the whole of Europe into a downward spiral, still hangs over Europe.
One country after another will be pushed over the precipice, starting
with the weakest ones. The rest, with a greater or lesser delay, will
follow. The strategists of Capital are aware of the danger. An article
by Thomas F. Cooley, professor of economics and dean of the NYU Stern School of Business, on 2nd June bore the title: This Greek Tragedy Is Only Beginning. In it he writes:
“For the next several years Greece will face a huge drop in output
and consumption. The magnitude of the drop in Greece will dwarf the
U.S.’s experience in its recent recession. It will take years for
consumption levels to return to anything close to pre-crisis levels.
Wages will fall, and access to capital markets will be limited. Greece
will be forced to restructure its debt. Several of the other
debt-burdened economies in Southern Europe will face similar, painful
adjustments.” (This Greek tragedy is only beginning, Forbes.com)
Portugal is a small economy, accounting for only 2% of euro-zone
output and public debt. Before they turned their attention to Spain,
the bond markets seemed to judge Portugal as the next weakest link in
the euro zone chain. Portugal’s bond yields jumped to 5.7% on May 5th,
an increase of 1.6 percentage points since the start of the year. Its
public debt reached 77% of GDP last year. This is about average for
Europe, but its budget deficit was 9.4% of GDP – a very high figure.
Portugal relies heavily on foreign capital and so is vulnerable to
market bullying. Its net international debt rose to 112% of GDP in
2009, after a run of huge current-account deficits. About half of this
is public debt; part of it is direct investment in big firms; but a
large portion, some 46% of GDP, is channeled through the banking system.
Lisbon protests that Portugal has scrupulously observed the
euro-zone’s fiscal rules, cutting its budget deficit from 6.1% of GDP
in 2005 to 2.8% by 2008. Public-sector jobs have been cut by 10%. In
2006 the Portuguese held down real increases in pensions at a time when
the economy was still growing rapidly, and relaxed the rules on hiring
These are the same kind of policies that the markets are demanding
in Spain and Greece. But this was all to no avail. For every step
Portugal takes to satisfy the markets, the latter demand three more.
Portugal has been warned that if is to refinance its existing debts at
tolerable interest rates, it must lower the cost of public borrowing.
That means it must undertake far more drastic action to cut the budget
The fall in the euro as a result of the crisis ought to help
Portugal sell more in Angola, Brazil, China and America. But a rise in
Portugal’s exports can only be at the cost of other capitalist
economies. In the end, the government will have no alternative but to
launch an attack on living standards. It has already pledged to cut
unemployment benefit. Public pay could be frozen. Big transport
projects could be scrapped and state-owned firms can be sold off to
satisfy the implacable demands of the Men of Money.
This means that all the gains of the Portuguese Revolution of 1974-5
will be liquidated. But such a counterrevolution cannot take place
without arousing fierce resistance from the Portuguese working class,
which has never forgotten the revolutionary traditions that burst to
the surface in those glorious days. At that time it would have been
possible to have carried through the socialist revolution in Portugal,
and this could have been accomplished peacefully.
The London Times in 1975 published an editorial with the title:
“Capitalism in Portugal is dead.” This ought to have been the case. If
it was not, the fault was not of the Portuguese working class, which
behaved admirably. The fault was with the leaders of the Socialist and
Communist Parties who were not prepared to take power when they could
have done so. As a result, the bourgeoisie succeeded in containing the
movement and reasserting its power.
For three decades the movement in Portugal has been pushed back. But
as Marx explained, the Revolution requires the whip of the
Counterrevolution. The attempt by the bourgeoisie to liquidate all the
gains of 1974-5 will arouse the Portuguese workers and youth. Already
there have been mass demonstrations on the streets.
The minority Socialist government has passed its economic programme
(the PEC), but it needs the support of the right wing PSD and CDS to
carry out an austerity policy. The working class has already reacted
with mass demonstrations, beginning with May Day, when 130,000
demonstrators came onto the streets of Lisbon. This was followed up by
another mass demonstration of 300,000 against austerity 29th
May, mainly organized by the Communist Party, but also Bloco de
Esquerda and the trade unions, above all the Communist-controlled
The crisis in Spain
Spain is a much bigger problem for Europe than Greece. It is
Europe’s fifth-largest economy, and if it follows Greece into a debt
crisis the effects will be felt throughout Europe and beyond. The
International Monetary Fund has warned that the Spanish economy needs
"far-reaching and comprehensive reforms" of its labour market and
In the last few years Spanish capitalism went up like a rocket and
is now falling like a stick. More than any other country in Europe, the
Spanish capitalists threw themselves into the orgy of speculation with
merry abandon. As a result, the collapse of the housing market has hit
Spain harder than anywhere else.
The Spanish economy had the fastest growth rate in the EU, but has
been in recession for nearly two years, and in the first quarter of
2010, grew by only 0.1 per cent. The economic collapse is reflected in
the frightful level of unemployment, which stands (officially) at 20
per cent – the highest in Europe (except Latvia) and one of the highest
of any developed capitalist country. The deficit soared to 11.2 per
cent of GDP. Zapatero wishes to reduce it to 9.3 per cent this year, 6
per cent next year and 3 per cent by 2013.
Zapatero wanted to avoid a clash with the unions, but under pressure
from Brussels and the White House, he has made an about-turn,
announcing a programme of painful measures which are supposed to save
€15bn over two years.. "We need to make a singular, exceptional and
extraordinary effort to cut our public deficit," he said. Barack Obama
made a personal telephone call to Zapatero the day before his
announcement to discuss the importance of "Spain taking resolute action
as part of Europe’s effort to strengthen its economy and build market
This “exceptional and extraordinary effort” includes a 5 per cent
pay cut for Spain’s 2.5 million public sector workers this year,
scrapping the €2,500 (£2,100) "baby cheque" for new mothers and a €6bn
cut in public investment. Spaniards living on the minimum pension have
seen their cost-of-living increases cancelled, and there will be cuts
to state medical expenditure, payments to people caring for elderly
parents. The plan also includes cuts to regional governments.
The fact that the American President had to ring Madrid shows the
deep concern in Washington over the parlous state of the European
economy, and the fears that the crisis in Europe will have the most
serious consequences for the United States. Brussels welcomed the cuts
promised by the PSOE government. The European Commissioner for Economic
and Monetary Affairs, Olli Rehn, said that the measures "seem to go in
the right direction" and that he expected similar announcements soon
EU Competition Commissioner Joaquin Almunia, a former leader of the
PSOE, called the cuts "a logical step" that is necessary "to avoid
greater evils in the financial markets and emerge from the crisis
sooner". Thus, Washington and Brussels loudly applaud the fact that a
“socialist” government is prepared to do the dirty work for them.
Despite this, however, the right wing PP is attacking the PSOE and
voted against its economic package.
Up till now Zapatero has avoided the type of unrest that has brought
thousands on to the streets of Athens because he managed to preserve
social benefits and protections in the face of repeated calls by
economists and business leaders for “labour reform”. However, the
austerity package has angered the unions. In an attempt to placate his
base, the Socialist Prime Minister stressed that despite the new
austerity measures, "the pillars of the welfare state will remain
untouched". This is the same song that is being sung by governments all
over Europe. But it does not make any sense.
"The behaviour of the trade unions has been and is impeccable during
these times of crisis and will continue to be so, but [Zapatero’s]
announcement is a turning point," Ignacio Fernandez Toxo, president of
the CCOO, has said. The union leaders were desperate to avoid a
confrontation with the government. But the union leaders can only keep
the unions in check if the government and the bosses offer them
something in return. But nothing is being offered except cuts.
Therefore, the union leaders are compelled to mobilize.
Until now there has been a low level of strikes because the
suddenness of the economic collapse and the onset of high unemployment
temporarily shocked the workers. This was entirely logical and was
foreseen by the Marxists in advance. We had to explain this to the
ultra left sectarians who, in Spain as everywhere else, imagined that
the economic crisis would lead immediately to a wave of strikes and
general strikes. Now a general strike is on the order of the day, not
only in Spain but in other European countries. A national strike of
civil servants has been called for 8 June and there is talk of a
The PP leaders have attacked Zapatero for letting the economy
deteriorate to the point that Washington and Brussels had to push him
into action. They are putting party interests before that of the
general interests of the bourgeoisie. This fact is a reflection of the
deep gulf between the classes in Spain, which was papered over by the
Transition, but which has emerged once more. Even before the economy
collapsed, the right wing had taken to the streets under the banner of
the Church, using the kind of language not heard since the days of the
As always, the reformists are preparing the victory of the right
wing. The PSOE is losing ground in polls against the conservative
Popular Party, despite a corruption scandal involving opposition
leaders. According to the polls, the People’s Party would win an
outright majority in parliament if elections were held now. But a PP
government would face a radicalized labour movement. It would be a
government of crisis, which probably would not last long and would only
serve to deepen the polarization between the classes.
The crisis has exposed the deep fault lines that underlie Spanish
society and politics, which were papered over, but not abolished, by
the so-called “Transition” from the Franco dictatorship to “democracy”.
In the next period these fault lines will open into an unbridgeable
abyss between the classes.
The whole situation is beginning to change. Spain faces a period of
heightened class struggle in which the workers will rediscover the
traditions of the 1930s and 1970s. By implementing a policy of cuts,
Zapatero has capitulated to the bourgeoisie. This is producing a mood
of disillusionment among those workers who had changed their vote from
the United Left (IU) to the PSOE in the last period, in order to block
the advance of the right wing and because the IU leaders were offering
no serious alternative.
Now that process will go into reverse. Through experience, militant
workers will come to understand the limitations of economic strikes and
turn to politics, and radicalized youth will look for the banner of
Communism. Despite all its deficiencies, the IU will increase its vote
and begin to pick up new members from the most radicalized layers of
society. The audience for genuine Marxist ideas will grow irresistibly.
In Italy Berlusconi has just passed an austerity bill off 24 billion
euros of cuts over two years. The ruling right wing coalition plans to
freeze the wages of public sector workers. The age of retirement for
women workers in the public sector will be raised to 65. Ten billion
Euros will be cut from the local administration, which will force local
councils to carry out deep cuts in social spending: schools, health etc.
Berlusconi won the elections thanks to the bankruptcy of the Centre
Left and only maintains itself in power for the same reason. The
Democratic Party shows itself to be completely impotent to take
advantage of the crisis of the Berlusconi government. But the latter
now has to preside over a programme of vicious cuts. The Italian
capitalists are supporting the present package but want the government
to go much further. The pressure from Confindustria is aggravating the
splits within the ruling coalition.
The impotence of the Left means that all the attention of the
working class is concentrated on the unions. The union leaders, as in
other countries, are no more inclined to conduct a serious struggle
than the leaders of the political “opposition”. At its national
congress, the CGIL decided that it was not the moment to lead an
offensive against the government. But they were forced by pressure from
below to call a four hour general strike in June.
This is an early anticipation of how things will develop. The defeat
of the Centre Left Coalition caused disappointment and disorientation
in the working class. But this mood will not last long. The impotence
of the “Left” opposition and the vacillations of the union leaders will
not prevent the radicalization of the Italian workers. Beginning in the
public sector, there will be a series of strikes and demonstrations,
which will transform the whole situation