James Meadway explains the growing crisis across Europe, the threat of more austerity ordered by the ruling financial elite and the need for a Europe-wide mass movement in defence of democracy and social welfare.

The European crisis continues, and worsens. Increasingly desperate, short-lived deals by EU ministers have failed to break the steady collapse. Their most recent effort, at the end of October, was to allow Greece to write off half of its debt. At the same time, the so-called “European Financial Stability Facility” (EFSF) emergency fund was to be ballooned in size from EURO440bn to EURO1tr.

The deal all but crumbled within a week. The EFSF was exposed as little more than a bag of hot air, containing no new money but relying instead on promises of cash – promises that may never materialise. The threat of a Greek referendum on the deal terrified the markets, while the 50 per cent debt write off was admitted, in a secret EU/IMF/ECB document, to be insufficient to rescue the country.

Market panic spread to Italy. Former Prime Minister Silvio Berlusconi, already a laughing stock, was reduced to admitting IMF monitors in to run his financial policy and writing pathetic begging letters to EU leaders.

At the time of writing, Italian borrowing costs have risen over 7 per cent again – the interest rate at which Portugal, Ireland and Greece threw in the towel, requesting EU and IMF support for their borrowing.

They have risen because speculators in bond markets, who trade government loans, believe that the Italian economy is in such a bad state that it, too, may default on its debt. As a result, Italy faces high interest charges.

Italy is the world’s eighth largest economy. A default there – or even the threat of it – risks the second global banking crisis just over three years since investment bank Lehman Bros collapsed.

France is particularly exposed. French financial institutions hold over 400bn of Italian debt. A collapse in Italy would shatter the French banking system, and spread across Europe. Because banks and financial institutions are tightly connected to each other by credit and investments, the collapse of one can have a domino effect across the whole system. This is called contagion. It can devastate entire economies within weeks – just as happened in East Asia in 1997-98, where country after country collapsed.

EU and other world leaders are incapable of preventing this. They will not take on financial markets. Instead, they promote austerity – cutting public spending so that debt can be repaid. To enforce this where needed, bankers are appointed heads of government, as in Greece and Italy, over the heads of the people.

But austerity ruins real economic activity. As government spending falls, demand falls, and firms sell less. They cut wages and lay off workers, further reducing demand. A vicious circle is created – just as is happening in Greece, Ireland and Portugal and is starting to happen in the UK.

To break this death-spiral, we must end austerity across the continent. Governments should be spending, not cutting. To stop contagion, we must break financial markets – imposing taxes on wealth, and strictly controlling the movement of capital. To make this happen, we need a mass movement, drawing in trade unions, Occupy protestors and all those opposed to austerity and fighting for democracy against the rule of finance.

Originally posted on Coalition of Resistance site | James Meadway is a senior economist at the New Economics Foundation (writing in a personal capacity)

Coalition of Resistance public meeting

Eurozone in meltdown

No cuts – No privatisation

Speakers:
Tony Benn
John McDonnell MP
Ntina Tzouvala (Synaspismos youth, Greece)
Arianna Tassinari (Co-President, SOAS Students Union)
James Meadway (senior economist, New Economics Foundation)
Kate Hudson (Coalition of Resistance)

Monday 28 November, 6:30pm
University of London Union, malet Street, London WC1E 7HY