A few years ago, Mario Draghi, President of the European Central Bank, stated he would “do whatever it takes” to save the euro and restore growth. However, while the euro has stabilised, temporarily, the European crisis has certainly deepened. This time it is threatening to plunge the European Union into the nightmare of a Japanese-style deflation.
Signor Mario Draghi, President of the European Central Bank, has tried to call up spirits from the deep like the Shakespearean characters Glendower and Hotspur. “I will do whatever it takes”, he said a few years ago. Such spirits were supposed to save the euro and restore growth. However, while the euro has stabilised, temporarily, the European crisis has certainly deepened. This time it is threatening to plunge the European Union into the nightmare of a Japanese-style deflation.
Glendower: I can call spirits from the vasty deep.
Hotspur: Why, so can I, or so can any man;
But will they come when do call for them?
(Shakespeare, Henry IV, Pat 1)
A never-ending crisis
Most bourgeois economists believe that capitalist wellbeing depends upon “confidence”, as if a few fine words from Draghi will put things right. But even the FT had to soberly admit that “Perceptions are important, but you cannot conjure an economic recovery by summoning the confidence fairy.” (FT, 21/8/14) Draghi has become the boy who cried wolf; “the recovery is on track”, he repeats. But nobody believes him anymore, including his recent end-of-August elite audience at Jackson Hole [where since 1978 the Federal Reserve Bank of Kansas City has hosted its annual economic policy symposium, becoming somewhat of a “Davos” for world bankers].
Six years after the collapse of Lehman Brothers, the world crisis continues to haunt large sectors of the globe, especially its weakest links. Europe is in deep crisis. China is in grave difficulties, as is Japan, whose economy fell by 6.8% in the last quarter, while growth in the BRICS has plunged. The United States is crawling along at less than 2% growth, with recent euphoria disappointed by last month’s jobs figures.
There are clear objective reasons for this continuing crisis. Mountainous debts, mass unemployment, sharp falls in demand, austerity and falling investment, all serve to drive economic activity downwards. European GDP is still lower than in 2008. All of this reflects the present impasse of the capitalist system. Even bourgeois economists, most notably Lawrence Summers, have coined the phrase “secular stagnation” to describe the situation. This means we are facing decades of stagnation. “We might remain in a low growth, low inflation environment for a long time”, states Fergus McCormick, senior vice-president of DBRS. (FT, 5/9/14) This is what Marxists call a protracted organic crisis of capitalism.
Added to this are serious geo-political tensions everywhere which, according to Joe Kaeser, chief executive of Siemens, pose “serious risks” for Europe’s growth this year and next. It shows how combustible politics is intertwined with economics. Ukraine’s crisis means that as much as $19bn additional international finance will be needed to face a contraction of 6.5% this year, having agreed an earlier $17bn loan. German industry is expecting a 20-25% drop in exports to Russia over the course of the year.
Stagnation and recession in Europe
Bourgeois economists define a recession as two consecutive quarters of declining output. However, this narrow definition fails to describe the real character of the present protracted crisis. Some have therefore attempted to adjust their definitions to take a broader view. They have warned that the signs of a shallow recovery in the Eurozone since early 2013 were insufficient to announce the end of the double-dip recession that started in the third quarter of 2011. They state correctly that the economy could go into reverse, or that stagnation could become the new, dismal normal of the Eurozone.
The second quarter’s figures for the Eurozone were shocking, showing that the economy had come to a shuddering halt. The German economy failed to grow between April and June and investment is falling. Italy had fallen into recession for the third time since 2008. France was stagnant, meaning that none of the eurozone’s biggest economies registered any growth whatsoever. The FT explained that “This is not a recovery, not even a fragile one. Nor is it a return to recession. It is a continuation of stagnation.” They go on to explain that none of the measures proposed – repairing the credit system, reform of state expenditure and taxation, more flexible labour markets – will liberate the Eurozone from stagnation. “The acute, pressing problem is aggregate demand”, it says. (FT, 21/8/14)
The ECB stepped in to cut interest rates again to negative levels. People have to pay to keep their money in the bank! These measures have now reached their limits. The ECB also plans to buy big quantities of packages of sliced and diced loans, commonly known as “toxic sludge”, (remember US sub-prime loans?) which is a vain hope of increasing bank lending. Such measures will have little or no effect. The only thing left is Quantitative Easing, as in the US, Japan and Britain. But the Germans are against and they are the ones who decide. In any case, QE would not work and could make things even worse. “It is exactly this type of ‘zombie lending’ that has curbed growth in Japan for more than a decade”, writes Michael Heise, chief economist of Allianz. (FT, 4/9/14)
Even an editorial in the Financial Times was forced to admit that “Given the malaise into which the Eurozone has fallen, it is now questionable to what extent monetary measures alone can sustain demand.” (FT, 5/9/14) They have run out of options. Given the contradictions whatever they do will be wrong. Eventually, in desperation they will be forced to try QE, but this will not save them. “Europe’s problems are structural, and QE will not fix them”, states Philipp Hildebrand, former chairman of the governing board of the Swiss National Bank.
An insoluble contradiction
Capitalism is cutting away the branch on which it rests. It is forced by the very logic of the system to attack the working class everywhere, cutting real wages, thus cutting the market. For the OECD countries as a whole – namely all the main capitalist countries – real wages have been stagnant between 2010 and 2013. In other countries, like Greece, Ireland, Slovenia and Spain (plus Britain), real wages have fallen by between 2% and 5% a year on average. In the US, between 1979 and 2012, real wages were flat for middle-income workers, but fell for the bottom 20%. Between 2010 and 2013, US median family income fell by 5%.
The idea of the Keynesians that simply increased wages will solve the problem misses the essential point that capitalist production is driven by profit. To increase wages will only serve to cut into profits, further pushing down investment and deepening the crisis. The whole of capitalism is in a vicious circle from which there is no escape.
“Any further reduction of wages being counter-productive because then we would run into a vicious circle of deflation, lower consumption and lower investment”, states Stefano Scarpetta, director of employment at the OECD. The only problem is that we are already in such a vicious circle. How else can you describe the situation?
“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity of society set a limit to them,” explained Marx. (Capital, Vol.3, p.615)
Capitalism overcomes this overproduction crisis in two ways: destroying the productive forces and finding new markets. Capitalism also creates its own market through ploughing back the surplus extracted from the unpaid labour of the working class. But today investment is falling as demand dries up, further exacerbating the crisis, as we can see. Artificially low interest rates have kept certain sectors alive, which would have otherwise gone to the wall, producing “zombie capitalism”, half alive and half dead.
A vicious circle
The capitalist system is in a vicious circle. Austerity was supposed to bring public sector debt under control. Yet debt-to-GDP ratios have actually risen as a result. With stagnation and deflation in sight – the inflation rate in the Eurozone has now fallen again in August to 0.3% – this will get worse.
Unemployment continues to ravage the lives of millions of families, with no respite in sight. Almost 45 million people were out of work in the OECD countries, 11.5 million more than just before the crisis. Spain’s unemployment remains at 24.5%. Youth unemployment is 60% in Greece, 50% in Spain and 40% in Italy.
The present protracted crisis is a striking confirmation of the correctness and farsightedness of the analysis of the Communist Manifesto – a classic capitalist crisis of overproduction.
“It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trail, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previous created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of overproduction. Society finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of destruction, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much subsistence, too much industry, too much commerce.”
The pessimism of the bourgeoisie is summed up by Wolfgang Munchau in the Financial Times, when after reviewing all the options to fix the European economy – Keynesian, Monetarist, Structuralist – he concludes “carpet bombing would be a much safer bet”! (8/9/14)
In the past, the world economy was driven by large increases in world trade, year on year. But world trade no longer plays that role. Factors promoting “globalisation” have gone into reverse. Five years into a technical “recovery” since the summer of 2009, world trade has gone into the doldrums. The World Trade Organisation has been constantly predicting an upturn. For this year (2014) it predicted world trade would expand by 4.7%. This is wildly over-optimistic, and shows they base their predictions more on astrology than on economic reality! According to the more sober Netherlands Bureau for Economic Policy Analysis, a government think tank that collates data from all around the world, world trade grew by just 1% in the second quarter after contracting by 0.6% in the first three months.
This is extremely serious for the prospects of capitalism. It is a reflection of the fact that the system has reached its limits. Globalisation is waning and there is a danger of it going into reverse. The collapse of the world trade talks is an indication of the contradictions on a world scale. Protectionism has been growing in all kinds of ways, reflected in the heading in the recent Financial Times called “The World is Marching back from Globalisation” (FT, 5/9/14). The article points to the sanctions against Russia and the banning of food imports by Russia in retaliation. “The open trading system is fragmenting”, states the article. “The collapse of the Doha round spoke to the demise of global free-trade agreements. The advanced economies are looking instead to regional coalitions and deals – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact. The emerging economies are building south-south relationships. Frustrated by a failure to rebalance the International Monetary Fund, the Brics nations are setting up their own financial institutions.”
This has enormous significance, given that the lease of life given to capitalism over the last 30 years was globalization, i.e., development of the world market. Once again, it shows that capitalism has exhausted itself and is incapable of developing the productive forces in any meaningful way. In the final analysis, as Marx explained, this failure to develop the productive forces, determines the fate of the socio-economic system.
Big trouble in not-so-little China
Additional complications facing world capitalism are the dangers facing the Chinese economy, which provided the powerhouse for previous global economic expansion. For a long time, China has been plagued by overproduction in a whole number of sectors, but has kept going on the basis of credit and a housing boom. Construction and real estate account for 13% of Chinese GDP, as well as being the backbone for the country’s fixed investment. A crisis in this sector would pose the greatest threat for the global economy.
Official figures for July show that 64 of 70 cities surveyed were experiencing falling house prices, the biggest monthly proportion of declines since records began in 2005. Investors are pulling back and floor space sold in July tumbled 16.3% year on year, down sharply from June. In other words, we have over-production in property. Everything is pointing to a crash, which Beijing seems incapable of preventing. The growth of the economy will be cut across by such a slump, having an immediate knock-on effect on the fragile world economy.
While the government controlled the credit issued by the banks, the growth of shadow banking has cut across this, creating enormous volatility. Five years into one of the biggest credit booms in history, Chinese banks are bracing themselves for a wave of bad debt linked to the property crisis. Signs of stress have already emerged, with a near collapse this year of a shadow bank. As word spread that a Rmb3bn trust product called “China Credit Equals Gold #1” was on the verge of defaulting, investors began to draw out their cash. A mysterious buyer bailed out the product in the nick of time. Today, shadow banks, essentially unregulated, account for a quarter of all financial transactions. It is the sub-prime mortgage scandal all over again but with Chinese characteristics.
On top of this, China’s manufacturing industry slowed significantly in August, a further sign of weakness in the world’s second-largest economy. The Chinese economy has been slowing for several years, but the sharp slowdown in the property market has led to fears of the industrial slowdown being even worse. The Chinese authorities have managed to keep things afloat for a number of years, but with internal and external pressures bearing in on the economy, one shock could drive the economy down, leading to a new slump internationally.
The limits of capital
The capitalist system is presently being affected by a whole series of contradictions that threaten its future. These fundamental problems are a reflection not of any cyclical factors, but arise from a fundamental malaise within the capitalist system. It means that the system has reached its limits. It can no longer develop the productive forces to any extent. While in the 1930s, the capitalist system found a way out through world war, which physically destroyed the productive forces and laid the basis for new markets, such a scenario is not possible in the present epoch. Nuclear war, the only character world war could take, would destroy the planet many times over. With this road blocked, it means that the contradictions will be further internalized and will open up an intensified class struggle everywhere.
Lenin once said that capitalism was horror without end. The present epoch constitutes a protracted death agony of capitalism with its local wars, mass unemployment and collapsing living standards. One thing is clear, after six years since the collapse of Lehman Brothers, there is no way out for the working class on this basis. Only with the abolition of capitalism and the introduction of socialist economic planning internationally can we put an end to this nightmare and guarantee a future of wealth and prosperity for humanity.