As we go to press the US Government and Congress seem paralysed in reaching an agreement on raising the Federal debt. EU leaders are also holding a summit to try to escape from the impasse created over the ongoing Greek debt crisis. As a result of the rise in interest rates on sovereign debt the crisis threatens to overwhelm the eurozone with knock-on effects for the whole capitalist world. Already Italy, one of the eurozone’s biggest players, is threatened. On both sides of the Atlantic all kinds of policies are being floated but they have one thing in common - to save the system the working class everywhere will have to pay more. That is, if we let them…

So now we have reached a time of dilemma and drama for Europe and the euro - we move forward or we sink. No-one should have any illusions of individual salvation. Just like on the Titanic, not even the first class passengers will be saved.

Giulio Tremonti, Italian Economy minister, addressing the Senate before the vote on the emergency austerity package

Italy is renowned for its rambling and labyrinthine political set-up yet the two houses of parliament have managed to pass a swingeing €45bn austerity budget in the space of a couple of days. The occasion for this remarkable display of swiftness and unity of purpose is that, more quickly than the pundits had predicted, Italy suddenly became the financial markets’ targeted weak link in the EU’s ‘sovereign debt crisis’. No sooner had a convoluted, albeit short-term, deal been patched up to allow Greece to roll over its debts in preparation for a further bailout engineered by Brussels than the ‘financial markets’ zoomed in on Italy. With a much larger economy and therefore a far higher figure of outstanding government debt than Greece, Ireland or Portugal the prospect of Italy being unable to borrow on the financial markets and possibly next in line for an international bail-out would clearly do little for investors’ confidence in the eurozone. Whether or not the Euro survives is not for us to speculate. Still, it is difficult to imagine Germany, the strongest state in what is now a well-defined imperialist entity and the ultimate holder of the purse strings, idly watching as the third largest economy in the EU and one of its founding members is obliged to declare itself bankrupt, especially given the amount of German capital invested in Italy. As it is however, Germany’s obsession with the dangers of inflation (for clear historical reasons) means that the European Central Bank (ECB) is prevented from doing what the Federal Reserve does in the USA: directly buy up government bonds on the open market and at a lower rate of interest than the financial houses, pension funds etc would demand. (Although this hasn’t prevented the ECB buying up Greek and other bad loans as part of its attempts to manage the crisis.)

In bourgeois economic theory the interest rate demanded on a loan is the price of ‘risk’. The more risky the loan, the higher the rate of interest demanded by the lender. So it was that in July - for whatever immediate reason, maybe Berlusconi’s open fall-out with his finance minister, Giulio Tremonti - ‘the markets’ deemed that Italian debt was riskier than it had been a month earlier. On Tuesday 11 July the interest rate on 10 year Italian bonds rose beyond 6%. By Thursday the Italian Senate was fast-tracking what must be the quickest public spending cuts package to be passed by any democratic assembly either side of the Atlantic, yet

The effect was [still] evident in Thursday’s auction of Italian debt. It paid 4.93% to raise €1.25bn (£1bn) of five-year debt, up a full percentage point in just a month. The US, by contrast, issued $5bn (£3bn) of two-week debt auctioned earlier in the week paying zero per cent.

The writer of the same piece (James Mackintosh in the Financial Times, 15.7.11) adds,

At these rates, Italy’s debt is unsustainable. The US’s would be too; its government deficit would be $2,400bn. At the same time, if Italy could borrow at US rates it would look to have a budget deficit of just 2 per cent, more like Germany than Greece.

Quantitative easing or no quantitative easing (QE2 officially stopped at the end of June), the United States in effect continues to print money to service its debts. This is even more the case now that overseas states are losing their enthusiasm for buying up US Treasury debt (notably China) and 80% of US recent bond issues have been bought up by the Fed itself. We have to say it again: The full mega-inflationary effects of this for the US domestic economy are only avoided because of the US position as the holder of the world’s reserve currency and the dollar’s role as the predominant currency of international trade. Even so, the Federal Reserve’s own index shows that since 2009 the dollar has declined by 17% vis-à-vis a proverbial ‘basket of currencies’, prompting speculation by ‘carry-trade’ investors who sell dollars to buy currencies with higher interest rates, often promoting domestic inflation (e.g. Brazil) and undermining export competitiveness. Comparisons with the competitive devaluations and trade and currency wars of the 1930s abound.

"Let’s at least avert Armageddon"

Meanwhile, the unique position of the dollar has only encouraged the US to ratchet up its debt. In round figures, the estimated federal deficit for this year is $1,645bn contributing to an overall (gross) public deficit of $15,476bn or close on a hundred per cent of GDP. (Worse than Portugal’s 91% and higher than the EU average as a whole, at a predicted 87% of GDP for 2011.) Since the US Congress imposes a ceiling on the amount of debt the federal government can run up there is always a tricky situation for the administration when it comes to negotiating the raising of that ceiling. This time though, a tricky situation has become a paralysing crisis. In order to maintain credibility and play by its own rules the existing ceiling of $14,300bn has to be raised (by 2nd August before the central government formally runs out of funds). The Republicans, spurred on by small-minded Tea Partyists, are refusing to tolerate any raising of the borrowing ceiling without massive spending cuts and, of course, they will not accept increasing taxes for big business and the wealthy. In case anyone thinks Obama and the Democrats are simply trying to protect social services, think again. Apart from an overall plan to cut $4,000bn over ten years, Obama has now charged his party to come up with “serious” deficit reduction plans in order to avoid “Armageddon”. At the same press conference he did the ‘we’re all in this together routine’; the need to “get our fiscal house in order” which would require

… some shared sacrifice and a balanced approach that says we’re going to make significant cuts in domestic spending. And I have already said I am willing to take down domestic spending to the lowest percentage of our overall economy since Dwight Eisenhower.
It also requires cuts in defense spending, and I’ve said that in addition to the $400 billion that we’ve already cut from defense spending, we’re willing to look for hundreds of billions more.
It would require us taking on health care spending. And that includes looking at Medicare and finding ways that we can stabilize the system so that it is available not just for this generation but for future generations.

politisite.com

Obama’s sop of cuts in defence spending cannot disguise the threat of draconian cuts to the whole range of social and health spending. Just like Europe and the UK, the United States is shackled by the weight of sovereign debt and obliged to demonstrate to the financial markets that it still basically a ‘sound bet’. Whatever the outcome of this particular crisis (As we write it is not certain that it will be resolved in time for the US to avoid being technically in default.) the whole episode marks a further step in the erosion of US standing and power in the world. Moody’s may not in fact downgrade the US from its top triple A rating. However, the fact that at the moment the US is on notice for a downgrade in its credit rating will only undermine the dollar’s image as a ‘safe haven’ and encourage the likes of China’s central bank to further review where it puts its foreign exchange reserves. Slowly China is laying the basis for making its own currency fully convertible and extricating itself from the dilemma of holding a large part of its foreign trade surplus in increasingly devalued dollars. Before that happens however, China may be able to invest in eurobonds. The calls are getting louder for Germany to allow the ECB to issue its own bonds in order to finally put the markets at rest about the euro. Ironically this would bring Merkel’s inflation nightmare nearer but at the same time strengthen the EU and Germany’s role as its leading power. In other words the ‘sovereign debt crisis’ also spurs on the reshaping the imperialist world order in the long process that began with the collapse of Bretton Woods.

The Wealth Chasm Deepens
The share of income claimed by the top 1 per cent of American earners declined after the Great Depression and the 2nd World War but from the late 1970s it suddenly started to rise.
Meanwhile wage growth for many has stalled. Between 1976 and 2007 in the US 58% of the total growth in income was captured by the top 1 per cent.
In the last five years the fraction of the population working has fallen from 63.1 to 58.4 per cent, with the number of jobs reduced by 10 million.

The Capitalist Crisis is More than Greedy Bankers

It’s true that the debts of the major capitalist states have been markedly exacerbated since the bursting of the speculative bubble in 2007-8. Deemed ‘too big to fail’ - and it is the case that the whole banking system was near to collapse - states basically took over responsibility for the losses incurred by a grotesque financial sector wheeling and dealing in ever-more complex financial ‘instruments’ which only hid their inflated and fictitious capital values. The neo-liberal myth that so long as we let the market prevail without any state interference then the world will be a prosperous place for everyone was shattered. The trouble is that an older myth is being revived. It is essentially the old social democratic myth which denies the inevitability of systemic capitalist crisis and instead insists that capitalism can be guided and managed so that it benefits everyone. In this scenario the decline of productive capital based on manufacturing is attributed to the rise of a predatory financial sector - the ‘greedy bankers’ - which should now be severely taxed and put back in its place by state regulation. This sort of idea, mixed up with a belief in the Keynesian virtue of letting the deficit run until the economy ‘revives’, runs through the TUC’s feeble anti-cuts propaganda. In his more scholarly moments (when he’s not demagogically calling for a ‘Robin Hood tax’ on the banks) Brendan Barber, TUC general secretary, acknowledges that government debt is now at the same kind of level as at the end of World War Two but argues that this was gradually reduced over the following years so there’s no reason why the same cannot be done now without all the social pain. What he omits to mention is that the reduction in sovereign debt was possible during the post war period because of the relatively high rate of economic growth, whereas today the whole of the advanced capitalist world is subject to stultifying low growth. Given the evident parasitic role of the financial sector it is easy to attribute the present torpid situation of the whole of the advanced capitalist world to the ‘greedy’ banking and financial sector which is starving productive capital - manufacturing, industrial - of investment. In fact the history of capital’s speculative booms and busts over the last decades shows that it is quite the other way round. From the Latin American debt crisis, through the boom and bust of the ‘Asian tigers’, the dot.com bubble and several others before the great deluge of subprime and the credit crunch, capital from the ‘real’ economy (i.e. the value producing part) has been diverting more and more funds to the financial sphere where it has been able to find ‘higher returns on investment’, in other words a higher rate of profit. The problem, as many have found to their cost, is that a substantial part of those paper profits are just that - pieces of paper based on fictitious capital values whose monetary value is only upheld so long as confidence in the whole edifice holds. In any case financial capital in itself cannot conjure up new value no matter how ingenious the financial instrument.

While the economic pundits are blind to the real source of capital’s apparent ability to generate new value: the unpaid labour of the workers who produce so much more value for capital than they are paid in wages, or in Marx’s terms ‘surplus value’, they know from historical experience that the burgeoning financial sector - the exact extent of whose liabilities are impossible for anyone to know but which can be safely estimated to at least match the equivalent of a year’s global GDP - is a sign of a deeper malaise in the ‘real economy’. Since new value can only be generated when someone expends their labour power and since capitalism is perpetually driven to increase profits this means it is continually striving to increase the rate of surplus value: the portion of the surplus value which it claims for itself over and above the cost of wages. And not only the portion. It is capital’s drive to acquire for itself an ever-bigger volume of surplus value (profit) that makes capitalism a uniquely innovative system of production. The problem for capital is that the more it increases its profits by introducing labour saving machinery and new technology the more it reduces the rate of profit until eventually it is either no longer profitable to produce at all or it is no longer worth innovating because the cost of doing so would outweigh the likely returns.

So it is today. Recently the Financial Times ran a full page spread entitled ‘Rivers of riches’ [23.5.11] highlighting that multinational (non-financial) companies are “replete with cash” which they are having difficulty spending. In the US “cash represents the biggest proportion of total assets than at any time in the past half century” - an estimated 5.5% in the last quarter of 2010. Similarly in the UK where “British companies had cash on their balance sheets worth 5 per cent of GDP” and George Osborne (Chancellor of the Exchequer) is quoted as saying that his job “over the next coming months is to persuade them to start spending that money”. So far the evidence is that the money is going into ‘mergers and acquisitions’ and buying up shares in vastly overvalued companies such as Facebook, another bubble in the offing.

Meanwhile workers everywhere, who may or may not work for a company “replete with cash”, face deteriorating, ever harsher working conditions including longer working hours for less pay. Capital is on the offensive and ruthless in its drive to try and boost profit rates by reducing the value of labour power: both wages and so-called non-wage additional costs. In this context the cuts in unemployment and welfare benefits that every government in the advanced capitalist world is introducing are not only aimed at reducing state budget deficits, they are part and parcel of a deliberate move to extort more value from the working class in the desperate search to revive profit rates and ‘growth’.

Today the real crisis for the whole capitalist world is the cyclical crisis of profitability which Marx identified in the 19th century. This brought penury and unemployment for workers and could only be cured by bankruptcies, takeovers, and the writing off of capital values. With the establishment of the capitalist world economy the cyclical crisis became global and it took the unparalleled destruction during two imperialist world wars in the last century to allow a ‘return to growth’ from a diminished capital base. World wars and recurring crises were supposed to have been eradicated with the setting up of the Bretton Woods system but that system was rocked to the core when the US unilaterally de-linked the dollar from gold in 1971, heralding the return of global capitalist crisis. Four decades on there are palpable signs of fear that there is not much room for manoeuvre left for capital in this crisis.

Commenting on the latest report by the Bank for International Settlements’ (BIS) which highlighted the growth of sovereign debt throughout the OECD and the absence of a political solution to the “gross financial flows coursing through the system” the Financial Times adds its own telling remarks:

Although the BIS does not make the case, the global financial system could well be in its most precarious state since the 1930s. … It took the second world war to level the global financial infrastructure sufficiently for a sound reconstruction.
A similar rebuilding - without the shooting - might be the best way forward. Perhaps the world needs substantial write-offs of old loans, the creation of new financial capital, or a substantial reworking of fiscal and trade arrangements. If so the BIS, an organisation of central bankers, is the wrong place to look for ideas. Policies of destructive creativity can come only from strong and innovative political leaders. Sadly, there are none of those in sight.

28.6.11

This is ominous in more ways than one. It confirms just how far the present crisis has matured in the past two or three years and how the capitalist class itself is beginning to contemplate solutions it has previously avoided. Meanwhile we leave it to our readers to imagine what the yearning for “strong and innovative political leaders” portends …

| General Government Debt as a Percentage of GDP - Source: Bank of International Settlements

| - | 2007 | 2010 | 2011 [est]

Costs have to be cut, they proclaim - except their own, naturally.

Antonio Padellaro, editor of Il Fatto, on the Italian parliament fast-tracking €45bn austerity budget

Italy’s finance minister waxed lyrical on how first class passengers were not immune from drowning if the EU as a whole did not pull together to save the euro. He wasn’t of course referring to the richest echelons of the capitalist class, people who have vast wealth without the need ever to work for a wage, but calling on Germany (i.e. German capital) to take on full responsibility for the euro and save European capitalism as whole. The cuts that have been brought in to reassure the markets that Italy’s deficit will be reduced to almost nil by 2014 follow a whole serious of measures in a familiar pattern of direct attacks on working class lives. They range from immediate new health service charges (e.g.€10 for a prescription and up to €25 for a hospital outpatient visit) to speeding-up pension ‘reforms’ and the prospect of a round of privatisations from 2013 (read job losses and wage cuts). In other words workers are paying to reassure finance capital of the value of its investments. As if they were not already bearing the brunt of this capitalist crisis. While it’s true enough that Italy’s budget deficit would be unremarkable if economic growth rates were higher this is merely stating that if it weren’t for the crisis of profitability there would be a higher rate of profit. In any case capital always has the same solution to low growth: increase productivity, i.e. get workers to produce more at less cost to capital. “Italy’s economy is dismally sluggish - productivity is one-third less than Germany’s yet labour costs are one-quarter higher”, pronounced the Financial Times on 13 July. This statement is dubious but the fact that it can be made indicates how much the working class in Germany has lost in recent years in the process of aiding “the recovery of lost competitiveness by German companies through ruthless control of wage costs to return the nation to the top of Europe’s league table”. (The FT again: Tony Barber, 17.4.11) However, the mindset of ‘the nation’ at one with the bosses to become ‘more competitive’ and ready to make sacrifices is exactly what capital wants workers to take on board. In fact, when it comes to Italy the new contract defining the terms for the sale of labour power drawn up by Fiat’s chairman Marchionne - who wants to make the cost of producing cars in Italy on a par with costs in Latin America - and supported enthusiastically by Confindustria (the Italian Chamber of Commerce) is a recipe to extend ‘social butchery’ to the whole of the working class. This ruthless plan covers all aspects of the working day, from basing 40% of wages to productivity (instead of the current 5%); insisting on 120 hours compulsory overtime per year; flexible work patterns made easier by shorter work breaks and putting meal breaks at the end of shifts, more difficult shift patterns; no absenteeism; no strikes. … In short, a recipe for ‘social butchery’. [The phrase is from an enlightening article on the situation of the working class in Italy by our sister organisation Battaglia Comunista (PCInt), see below.]

It is not for communists to accuse one group of workers of being better off than another. The purpose of describing the situation facing workers in other countries is to emphasise a) the similarity of the attacks being made by capital throughout the whole of the advanced capitalist world and b) the impossibility of a solution inside the capitalist frame.

With this understanding it should be impossible to envisage a ‘national’ way forward for any group of workers yet amongst the clamour of supposedly revolutionary solutions there are those who argue, for example:

For Greece, the strategy is clear: default, exit the euro; nationalise the banks and introduce capital and currency controls; impose a confiscatory tax on the wealthiest, investing in green infrastructure and jobs to maintain demand. For southern Europe a similar assault on the citadels of finance must be made. And across the whole continent, the policies of neoliberalism must be thrown into reverse, country by country: halt financial contagion through exchange and capital controls; tax the rich to raise funds and kill off speculation; increase government spending to boost demand; invest to create green jobs. With workers at its heart, a European movement against austerity must be now constructed.

This is a quotation from a supposedly anti-capitalist website, [counterfire.org ]. It is a particularly blatant and pernicious example of the return of the reformist and social democratic myth that the capitalist crisis is simply one of ‘neoliberalism’ and finance capital; that the capitalist state can, country by country, manage the economy to benefit the working class. If it is true that “the thousands occupying public squares in protest against austerity have shown a glimpse of the alternative” it is not because of the calls for ‘real democracy’ - a concept which means nothing unless it is about proletarian democracy after the overthrow of the capitalist state - or even because of the calls to punish the banks: it is because it is an indication that there is a limit to what the working class as a whole can endure. This in itself, however, will not be enough to overthrow capitalism. For that to happen the working class must be able to see a way towards a different society. For revolutionary political organisations it means being able to criticise as well as welcome protest movements when they arise, being able to distinguish between the desire to get rid of capitalism and the pitfalls of focussing on one aspect of capital rather than a programme to get rid of the whole filthy edifice. For the moment it means acknowledging that:

"Never in recent history has the balance of power between labour and capital been so much in favour of the latter. Not only has the proletariat failed to struggle against capital, even in terms of demands, but - apart from a few episodes like Greece and France - it clearly has not put up any concrete resistance to capital’s attacks. This allows the bourgeoisie to reinforce its domination and to easily extend its ‘ruling ideas’ in order to justify the unjustifiable. There are cuts to the health service, schools, research: of course, it’s the crisis. Taxation doesn’t get any lower but fiscal pressure mounts. The purchasing power of wages is static or declining and yet another round of cuts is required, and it’s all the fault of the crisis. In Italy there are 8 million people living below the poverty line. Another 8 million are in danger of joining them. The number of new jobs is declining while those that remain are increasingly precarious, both in terms of job security and hours worked: it’s because of the crisis. The refrain is repeated as if the crisis was an external factor, something which has rained down on society from outside. A sort of unpredictable and unavoidable natural disaster which overwhelms everything and wrecks it, leaving behind only death and destruction. An event which cannot be prevented but from which there has to be a new start with a new spirit of sacrifice and willingness to adapt - obviously on the part of those who produce surplus value, who are the object of exploitation. Nothing could be more false and misleading than this propaganda. The crisis and its ominous social consequences are none other than the poisonous fruit of capitalist productive relations.
The causes of economic and social breakdown are to be found within capitalist society, within its method of producing and distributing wealth based on the capital-labour relationship with its unique and essential aim of producing a profit in the so-called real economy. The ephemeral financial gains which capital resorts to in times of crisis in the rate of profit give rise to giant financial bubbles which, when they explode, fall on the productive economy, devastating the already fragile fundamentals and creating the conditions of impoverishment we are witnessing today. Thus, struggles for particular demands, or simply to resist capital’s attacks, cannot avoid being posed - right from the outset - in anti-capitalist terms. Only thus can the system be challenged. Only thus can an alternative be found to the unsustainable social organisation which, in order to survive its self-generated crisis, can only bring more misery and unemployment. Only in this way can the continuous chain of devastation be broken. A concrete stand has got to be taken against the perversity of a system which manages to produce only greater penury for the many and ever more wealth for the few. Unless there is a struggle against capitalism itself wage slavery will continue to be the condition for the iniquitous distribution of social wealth. This presupposes that the struggles to come will escape more and more from the framework of the system, from the overwhelming role of the unions which aim to contain them and when they do organise them, drain them of every ounce of real protest and intolerance of a society which is now only capable of producing increased poverty and unemployment, economic crisis, wars and social and environmental devastation.
What is also needed is that the struggles regain a sense of a social alternative: the possibility of a world where the production and distribution of wealth no longer depend on the capitalist logic of profit but on the needs of those who do the work and produce the wealth. What’s needed too is the active presence of a class party calling for the demands posed by capitalism itself and capable of channelling the struggle towards these objectives. (Fabio Damen, Political Slime and Crisis in Italy, translated from Prometeo, the PCInt’s quarterly review and available in English on the ICT website leftcom.org )