The following article was first published in Proletarian Revolution No. 83 (Fall 2010).
When Wall Street stood on the brink of collapse in the fall of 2008, threatening to plunge the world into a new Great Depression, every government that could afford to stepped in to rescue their bankers and financiers with trillions of dollars of bailout funds. This transfer of enormous private debts and unprofitable investments to government books, together with tax breaks to capitalists, emergency government spending and other “stimulus” measures, averted an outright depression.
But as our analysis in the previous issue of Proletarian Revolution explained, underlying the crisis throughout the financial world was the fact that while stock and property values had risen to record highs, the world capitalist economy’s profit-making had been stagnating for decades. The multi-trillion dollar bailouts did nothing to address this. Rather, by relieving the private financiers of their “toxic assets” and most burdensome debts, the bailouts turned a crisis for private capitalists into an inevitable financial catastrophe for many governments – while at the same time allowing market speculation to inflate new bubbles of imagined wealth and financiers to amass new mountains of debt.
As we observed:
Far from solving the crisis, the bailouts have only delayed the collapse of the financial house of cards while greatly expanding the eventual cost. For as long as capitalism exists, the ups and downs of the economy will continue. But the depth of the current crisis is a warning that the system is preparing a catastrophe. The financial sector is building toward a crash that will wipe out vast amounts of the system’s illusory values and usher in a downturn far deeper than any cyclical recession – a new Great Depression.
Indeed, after a year in which production and trade have begun to recover, the working classes in Europe and America face continued mass unemployment and relentless attacks on their living standards. And now the financial tremors are rumbling again, as the enormous government debts of several European countries have come due. These debts ballooned as a result of the immense costs of the bailouts, as well as by the fall in tax revenues caused by the recession. And the problem is far larger than before: the paper value of the mortgage-related toxic assets that had to be absorbed by U.S. banks in 2008 was of the order of $2 trillion. In comparison, the combined public and private debt of the riskiest European countries is almost $9 trillion.
The chief economist of Citibank, Willem Buiter, warned the influential American think tank, the Council of Foreign Relations, on May 7:
The public finances in the majority of advanced industrial countries are in a worse state today than at any time since the Industrial Revolution, except for wartime episodes and their immediate aftermaths. Most of the richest industrial nations are on unsustainable fiscal financial trajectories.
Thus the global financial crisis has resurged in a new sector. And governments across Europe are adopting austerity measures to satisfy the financiers, paying for the bailout of their banks by cutting public sector jobs and wages along with spending on social services.
In other parts of the world, rising economic powers like China, India and Brazil managed to emerge more rapidly from the global crisis. One reason is that their banks had not engaged as much in the speculative frenzy that threatened to break the biggest banks in the U.S. and Europe. Another is that they had taken advantage of the low-wage labor at home to build up strong foreign-exchange reserves – funds they could use to fund continued production. But tensions between China and its economic rivals have built up rapidly, as the U.S. pressures China to raise the value of its currency – in order to make Chinese goods less competitive on the world market. The resurfacing economic crisis will further exacerbate international rivalries.
Why did the new wave of financial crises break out in Europe? Upon its creation in 1993, the European Union (EU) was hailed as proof that the national divisions and hostilities that had produced two world wars were finally overcome. The breaking down of trade barriers and the creation of a common currency, the euro, were celebrated as promising a new era of trans-national economic integration and capitalist prosperity. In reality, however, the national divisions inherent in capitalism have deepened beneath the EU’s appearance of unity.
Europe’s strongest imperialist states deepened their super-exploitation of less economically developed nations. Importantly, the desperately poor workers of the former Stalinist-ruled states of Eastern Europe provided a new pool of super-exploitable labor, including those who immigrated to the European imperialist centers. On the other hand, weaker countries had been drawn into the EU on the theory that breaking down trade barriers would allow growth for all and that a united Europe would be better able to compete with the U.S. internationally.
After the financial crisis, differences emerged among the major European imperialists, and the division between them and the poorer countries has widened. Some of the latter had seemed to rapidly improve their economic standing via the EU, but the crisis has burst these illusions: now they are heavily in debt to the imperialist banks. In non-crisis times the separate governments retain some economic independence. But when crisis hits, the wealthier demand that the weaker tighten up.
For example, before the crisis Ireland had become a center of financial speculation. During the 2008 turmoil, the government laid out 11 billion euros (about U.S.$16 billion) to rescue its banks, and then used funds from the European Central Bank to cover five times that amount in toxic assets. In the recession, the country’s output plunged by almost 10 percent and the government deficit rose to over 30 percent of Gross Domestic Product, while unemployment has climbed toward 20 percent.
Greece, Portugal and Spain amassed huge budget deficits. The German and French governments were happy to hand their own bankers blank checks last year when they were tottering. But this year, when it came to salvaging social programs that aid workers and poor people (especially those of the weaker EU states), they piously declared the need to keep within tight budgets. In late 2009, financial speculators, fearing that these countries might default on their debts, drove up the interest rates their governments have to pay to borrow further. As a result, Greece in particular teetered on the edge of insolvency.
Thus on May 2, the EU and the International Monetary Fund offered to provide Greece with 110 billion euros ($150 billion) in emergency loans. These were contingent on a promise by the Greek government to implement a savage austerity attack on the working class – a public sector wage freeze, thousands of layoffs, pension cuts, reductions in unemployment benefits, abolition of union contracts, big hikes in the value-added (sales) tax, along with slashes to government spending on health, education and social security.
The nature of the rescue plan was exposed in a report by the Center for Economic Policy and Research in Washington:
The major part (almost 80%) of Greek sovereign debt ... is in the balance sheets of German, French and UK banks. Europe and the IMF are not so much providing Greece with fresh finance but, most of all, shielding the European financial system from up to 200 billion euros of losses that could result from a Greek default. Curiously, almost one quarter of Greek debt is located in the UK (and Irish) financial sector. The obvious beneficiaries of the Euro Area governments’ package are not Greek workers and citizens, who will suffer from severe budget cuts and recession, but financial centers such as the City of London.
Greece was the most prominent victim of the attack. But even weaker economies like the former Soviet-bloc nations Latvia, Lithuania and Romania had already been hit. Now that Portugal, Ireland and Spain are also over their heads in debt, these countries along with Greece have insultingly been given the acronym “PIGS” – as if their workers’ greed, not that of the international financiers, is responsible. The butchers are demanding their pounds of flesh from the “PIGS.”
There has been resistance: earlier this year, Iceland’s voters resoundingly rejected a U.S.$5 billion plan to pay off international financiers and threw out their government. And the working class started moving in 2009, via a series of one-day general strikes in France and Greece followed by Italy, Spain and Portugal.
A significant turn came in May, when the Greek working class fought back with huge strikes directed against the government’s acceptance of the austerity terms demanded by the EU and IMF. Hundreds of thousands of private and public sector workers, unemployed, youth and immigrants turned out for the biggest and angriest demonstrations in decades. The Athens demonstration went on for hours, resisting continuous police attacks and raids.
The Greek mass strikes opened wide the possibility that the government would have to default on its debts or drop out of the common currency. In order to forestall such a danger, in other countries as well as Greece, on May 9 the EU undertook a more massive rescue plan: its finance ministers pledged almost $1 trillion to extend the bailout beyond Greece – to aid any member countries that faced a similar public debt crisis.
This huge commitment was intended to have the impact of the U.S. bailouts in late 2008 that halted the collapse of several Wall Street banks. President Obama was reported to have strongly encouraged the new plan in phone calls to German Chancellor Merkel in particular. He feared the break-up of the EU and the international instability that would surely follow: the financial collapse of even the weakest European states could unravel much of the world’s financial structure. Like the U.S. model, the new fund was aimed at rescuing not the over-indebted countries but the international banks that are heavily invested in their bonds.
Jean-Claude Trichet, head of the European Central Bank, stressed the urgency of the rescue plan:
It is clear that since September 2008 we have been facing the most difficult situation since the Second World War – perhaps even since the First World War. We have experienced – and are experiencing – truly dramatic times.
In anticipation of what the bankers’ rescue would require, in May Spain’s Socialist Party prime minister announced austerity measures including: a 5 percent pay cut for public workers, the freezing of most pension payments, ending the government subsidy for families with new babies, the cancellation of funding for prescription drugs, and slashing public investment in transportation projects and funding for local governments. Portugal’s equally “socialist” government also announced cuts but provided fewer specifics. At the end of May Italy followed suit, and France also disclosed plans to hike the retirement age and cut housing and other benefits.
In Britain, before the parliamentary election of May 4, the top capitalist paper, the Financial Times, warned all parties that “The next government will have to cut public sector pay, freeze benefits, slash jobs, abolish a range of welfare entitlements and take the axe to programs such as school building and road maintenance.” The new coalition government of Conservatives and Liberal-Democrats has done exactly that. Ireland has been especially hard hit. Despite one of the most stringent austerity programs, its government’s credit rating has been reduced, thus raising its interest payments.
In the richest imperialist power of all, the U.S., key sections of the ruling class are demanding austerity along Greek lines. Key areas under attack, as in Europe, are jobs and services in the public sector: with most state budgets facing big gaps as a result of the recession, governors and legislatures are carrying out deep cuts in spending for vital services. And the expanded Federal deficit, a result of the bank bailouts as well as the recession, gives Washington an excuse to limit aid to the states and force cuts to public spending and jobs. The “No New Taxes” cry of practically all the politicians really means no higher taxes on the rich – but plenty of fees, price hikes, cutbacks, furloughs and layoffs that amount to severe attacks on the working class. This is a bipartisan strategy, being conducted by Republican and Democratic governors alike – with more drastic proposals coming from conservative Republicans and Tea Party types.
On the Federal level, President Obama has appointed a commission to come up with proposals for how to pay for the bank bailouts and reduce the deficit. The Democratic co-chair of this commission, Erskine Bowles, left no doubt as to where he believes the money can be found: he told a bankers’ convention in March that “We’re going to mess with Medicare, Medicaid and Social Security because if you take those off the table, you can’t get there.” And his Republican partner, former senator Alan Simpson, caused a small scandal when he contemptuously referred to Social Security as “like a milk cow with 310 million tits.” The commission’s conclusion is evidently already decided. Its real purpose is to provide cover for Democratic politicians like Obama who don’t want their own fingerprints on the knives that slash Social Security for workers yet to retire.
In justifying the anti-working class attacks, a particularly nasty capitalist spokesman is Thomas Friedman of the New York Times, who blamed whole generations for living high on government handouts during the 65 years since World War II. His column concluded: “Goodbye Tooth Fairy politics, hello Root Canal politics.” Spelling it out, he wrote:
Britain and Greece are today’s poster children for the wrenching new post-Tooth Fairy politics, where baby boomers will have to accept deep cuts to their benefits and pensions today so their kids can have jobs and not be saddled with debts tomorrow.
This whole case is an outrageous lie. The only ones living off Tooth Fairy economics have been the financiers and investors – not just the outright frauds like Bernie Madoff, but also the ordinary capitalist exploiters who run Citibank, Goldman Sachs and the rest. Even though many of their inventive forms of fictitious capital (“derivatives”) collapsed, they were saved from the Root Canals they deserve by the generosity of the government their friends run and the rest of us pay for.
On the other hand, working-class wages have stagnated – in the U.S., for almost 40 years. Correcting for inflation, real earnings are no higher today than in 1973. Meanwhile, the top capitalists and financiers have been raking it in; in the 2000’s, the richest 1 percent of the population took 25 percent of total income, compared to 10 percent in the 1970’s. And it is not just public programs like Social Security that cost money – the capitalists’ propagandists choose to overlook the trillion-dollar costs of their imperialist wars and bank bailouts. It is the capitalists, not the workers, who have been grabbing goodies from the Tooth Fairy. And whatever they’ve grabbed has come from the labor of the working classes they now condemn to austerity.
Nevertheless, propagandists like Friedman have a point. Despite their rampant profiteering, the capitalists’ system is in a serious crisis. And Friedman is in effect admitting that the hopes of millions for a better life will be dashed. He might more honestly have said “Goodbye American Dream, hello capitalist nightmare.”
Given the threat to their economic system, the capitalists and the governments that rule for them are desperately debating solutions. Promoters of renewed stimulus spending fear that growing unemployment and falling wages in the U.S. threaten the collapse of the U.S. consumer market, spelling disaster for U.S. and global economic production; they call for government intervention to reverse these trends. Advocates of harsher austerity may or may not concern themselves with the consequences of their economic policies for anyone beyond the financial capitalists, but they are closer to expressing the basic truth that capitalism can only survive by dramatically escalating its exploitation of the working class.
The debate surfaced during the Group of Twenty (G-20) economic summit conference in Toronto at the end of June. There the Obama administration hypocritically campaigned for renewed stimulus programs (state spending), against the European powers’ open insistence on cutting spending to reduce their growing budget deficits. Germany in particular rejected a domestic stimulus policy, relying on its position as a predominant industrial exporter to maintain economic stability. The U.S. in the end signed on to the Europeans’ austerity program.
The influential economic columnist Paul Krugman warned that the G-20’s policies could lead to a “Third Great Depression.” He blames the danger on an economic orthodoxy “that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.” Krugman has no conception that capitalism rests on exploitation – that capitalists need to impose suffering in order to squeeze profits out of “other people,” the working class and the super-exploited countries.
Underlying this debate is the reality that we explained in our article in Proletarian Revolution No. 82. This can be summed up in three points:
1. Global capitalism has been undergoing a long-term decline in its rate of profit, a tendency first foreseen by Karl Marx in the 19th century. This is despite its apparent triumphs in recent decades: the opening up of China and other countries to unfettered super-exploitation and the expansion of information technology based on computers and the internet – both of which contributed to the slashing of workers’ real wages while at the same time advancing productivity.
2. For almost two hundred years, capitalism was able to periodically revive its profits through the system’s cyclical crises. Crises would not only weaken workers’ resistance but would also force the least efficient enterprises out of business, so that their capital could be acquired cheaply by the capitalists who survived. But in the past century the rise of monopolies and imperialism means that such crises threaten to spread beyond the least efficient capitalist enterprises and bring huge sections of the capitalist class crashing down. So monopoly capitalists and interventionist governments have cooperated to dampen the effects of periodic crises – but this undermines the crises’ “cleansing” of the system and sets the stage for deeper and long-lasting crises whose depression conditions are features of capitalism’s epoch of decay.
3. In the absence of a major depression since the 1930’s, large inefficient capitals survived and retained a highly fictitious evaluation. At the same time, financial capitalists came to play an ever-increasing role. Unlike industrialists who are heavily invested in existing factories, equipment and trained workers, financiers are more flexible and able to shift capital around. To do so on a large scale required planning and decisiveness. Thus leadership of the capitalist class was increasingly exercised by financial capitalists. And in the absence of sufficient outlets for profitable investment, the financiers led the way in creating bubbles of fictitious capital – the “dot-com” stock market surge in the 1990’s and the skyrocketing housing, fuel and food prices of the 2000’s.
The capitalists are competing for profits at a time when genuine surplus value produced by productive workers is not only inadequate in relation to the amount of capital invested; claims by owners of the fictitious capital are also ballooning once again, thanks to the trillions of dollars pumped into the system to keep the financiers afloat. So new rescue packages for the capitalists will not salvage the situation: even if the workers’ resistance falls short of halting the capitalists’ attacks, the underlying stagnation in the “real” economy will remain, exacerbated by the re-inflated bubble of fictitious capital.
As an indication of how fictitious capital has been building up since the crisis first hit, the budget deficits of the 30 members of the Organization for Economic Cooperation and Development (OECD), roughly the world’s richest countries, have grown by a factor of almost seven since 2007. The total deficit is about $3.4 trillion today, while their overall total debt burden has also grown to an unprecedented $43 trillion. In the euro zone alone, national deficits have grown 12-fold in the same time period, while their total debt is $7.7 trillion.
Thus in the present debate the gist of each side’s argument is that the other’s policy could lead to another economic collapse. The stimulators fear that the much ballyhooed recovery is weak and that if the “free market” is allowed to do its work and sweep away inefficient capitals, the Great Recession could become another Great Depression. They want production, services and trade (the “real” economy) to be restored to health by government intervention. But under capitalism stimulus is no panacea. Another stimulus program would just postpone the need to cut back to austerity. In the 1930’s, the U.S.’s domestic stimulus did not restore economic health. Only the military spending of World War II did that – and those costs got repaid only through victory in the war, with the U.S. the only great power surviving without major destruction. Thus the U.S. was able to exploit the world’s labor and natural resources, at a time when its imperialist rivals were either ruined by wartime defeat or else greatly weakened by the war.
The austerity proponents worry that the bursting of another financial bubble could bring about a repeat of the panic of 2008, after the Bush Treasury Department allowed the giant Lehmann Brothers investment bank to go under. According to the International Monetary Fund (IMF), the 34 states that it regards as advanced economies spent an amount totaling over 50 percent of their total national output on purchases of bad assets from the big banks, along with guarantees and other injections of capital. But now they say enough is enough – when it comes to saving or creating productive jobs. They argue that the financiers have to be paid back every dollar or euro they are owed by indebted governments, which means that the rest of the economy – led by public sector wages and services – has to suffer.
At this point austerity is winning. This policy is most prominently promoted by the financiers, still the most influential section of the capitalist class despite the catastrophe they helped bring about a few short years ago. The chief argument is that the capitalists can no longer postpone an open effort to squeeze more profits out of the working class. The austerity-pushers are relying on the (feeble) signs of a recovery to shoot for rescuing profits at workers’ expense – figuring that a fallback in production can be survived.
That is why so many capitalist powers have stepped up their attacks on public spending. They do not see that saving their system requires more than cutting public services and squeezing workers’ wages. There has to be devaluation of plenty of real capital, not just fictitious – and even actual destruction of capital. The only successful methods capitalism has are depression and imperialist war.
Workers everywhere need to start with the anger and militancy that their Greek and French brothers and sisters have shown this year. But militancy is not enough. While the Greek workers fought the attacks, the leadership of their organizations undermined their efforts, advocating changes in the government’s austerity schemes, not its rejection. Dedicated to the needs of capital, they did not withdraw their support for the pseudo-socialist PASOK government.
As in many countries, the mass strikes they led were limited to several hours or one or two days, instead of continuing until the workers’ demands are met. As a rule, the time-limited general strike strategy is intended by the union bureaucrats to serve as a safety valve to allow workers to blow off steam. But if workers lose a day’s wage every few weeks without tangible successes, they could become increasingly demoralized.
For months the Greek resistance commanded the attention of militant workers across Europe who knew that they would soon face similar attacks. But the union leaders in other European countries dared not seek to build on this momentum by launching strikes in solidarity with the Greek workers and against the impending attacks in their own countries. Those bureaucrats, most of whom title themselves Communists or Socialists, are in fact reformists whose goal is to limit the workers to what can be salvaged in a capitalist economy.
The situation is no better in the U.S., where the leaders of the unions and organizations of Black, Latino and immigrant workers are tied to the openly capitalist Democratic Party, and above all the Obama administration – even though Obama has proved himself to be the champion of Wall Street, not the working class.
European resistance accelerated in early October, when there was a Europe-wide series of actions, including a mass march in Brussels, the headquarters of the EU, and another 24-hour general strike in Spain. And as we write in late October, millions of French workers have struck for several days in protest against pension cuts and other attacks. But overall the resistance has been disastrously unequal to the level demanded. The rulers are shouting from rooftops their intention to increase austerity. To halt this, the workers need to respond with unlimited general strikes until the governments retreat.
A report on the French strikes is on page 24. It is also important to report on the work of two French groups that are well known for their claims to be Trotskyist: Lutte Ouvrière (LO: Workers Struggle) and the Ligue Communiste Révolutionnaire, now dissolved into the New Anti-Capitalist Party (NPA). In the presidential elections of 2002, their candidates jointly won 10 percent of the vote, a significant showing for avowed revolutionaries.
But in the current struggles, both the NPA and LO failed the working class and disgraced themselves: they refused to fight against the reformist union leaders’ strategy of calling only protest strikes, even though an open-ended general strike was necessary. In October, just when militant workers were demanding an all-out struggle for victory, the NPA dropped the call for a general strike, claiming that it was “not credible in the workplaces” and retreated to calls to “accelerate and amplify the movement.” (Le Monde, Oct. 24.) LO’s activities have not been as widely reported, but judging from their press and communiqués, they too have respected the limits to the struggle set by the union bureaucracy, calling for more and bigger strikes but not a general strike.
The solution has to be political as well as economic. The crisis can only be resolved by society-wide policies that overcome the capitalists’ grip on the economy and reorganize it in the interests of all. And just as particular struggles of workers for limited economic demands tend to raise the need for systematic political solutions, the mass protests, strikes and other struggles of workers and poor people tend to raise the question of political power. By increasingly paralyzing the normal functioning of the economy and state, general strikes in particular raise the question of which class is to hold power in society.
During the social turmoil in the years following World War I, the British Prime Minister Lloyd George told the union leaders, “we are at your mercy.”And he added:
If you carry out your threat and strike, then you will defeat us. But if you do, have you weighed the consequences ... For if a force arises in the state which is stronger than the state, then it must be ready to take on the functions of the state, or it must withdraw and accept the authority of the state. Gentlemen, are you ready?
The pro-capitalist union bureaucrats were duly frightened at the revolutionary implications and chose to save capitalism – and the ruling class attacks continued. The same will happen today if the workers’ struggles are left in the hands of leaders who refuse to go all the way – that is, to do away with the capitalist state and replace it with a workers’ state.
The crisis is international, and the capitalist rulers understand this. The most politically conscious workers likewise need to campaign for actions in one country to be backed by actions in many others. The efforts by the ruling-class media to whip up national hatreds (“lazy Greeks,” “Nazi Germans,” etc.) must be rejected with powerful displays of international solidarity.
Advanced workers also have to fight for programs to solve the crisis. The Greek working class repeatedly demanded an end to the capitalist attacks – but did not have a program to stop them. Revolutionary workers should demand that their government not only halt its own austerity attacks but also renounce the debts to the financiers. Especially when the government claims to be socialist, workers will expect it to act in their interests. The vanguard workers would point out that the government really serves the capitalists – but this can be proven to the mass of workers only through their own experiences in struggle.
German and French workers likewise should be calling for cancellation of the debts to the imperialist financiers, along with demands to stop the government’s cutbacks in their own country. These demands are sharply distinguished from the capitalist bailouts: the bailouts mean that the workers and other taxpayers across Europe are paying off the financiers, using the governments of Greece and other indebted countries as intermediaries who simply pass the funds along to the banks. In contrast, canceling the debts means that it is the bankers and the capitalists who pay.
This is not to say that the capitalist financiers and governments should remain in power, even if forced to retreat by a rising working-class movement. The banks have to be seized and put to public, not private, use. In a multinational region like Europe, this cannot be done by simply nationalizing them, since an institution like the European Central Bank has to be run internationally and have broader powers.
It is clear that there can be no truly internationalist solution under capitalism, given the competing interests of the different national bourgeoisies – other than the conquest by one imperialist nation of all the others. The general capitalist compulsion to expand inevitably takes its most devastating form in the epoch of imperialism – inter-imperialist world wars.
The only genuine solution is an international federation of workers’ states, which means the working classes overthrowing capitalist rule and taking power throughout the region. Workers’ states would plan the economy in the interest of public needs, not private profit. The socialist society they aim for would provide for an abundance of all needed goods and services, thus doing away with the need for society’s division into contending social classes.
Lloyd George’s admonition to the British union leaders applies all the more today – are the workers’ leaders prepared to take power and spread the revolutionary struggle internationally? The challenge today is to build an international working-class revolutionary party that is up to that task.
1. Walter Daum and Matthew Richardson, Marxist Analysis of the Capitalist Crisis: Bankrupt System Drives Toward Depression PDF, Proletarian Revolution No. 82, Winter 2010.
2. Edmund Conway, “Is Europe Heading for a Meltdown?,” The Telegraph (UK), May 27, 2010.
3. Willem Buiter, “Sovereign Debt Problems in Advanced Industrial Countries,” Speech to the Council on Foreign Relations, May 7, 2010.
4. “Greece and the IMF: Who Exactly Is Being Saved?” PDF, July 2010.
5. “European Central Bank President Jean-Claude Trichet: A ‘Quantum Leap’ in Governance of the Euro Zone Is Needed,” Interview with Spiegel Online, May 15, 2010.
6. Financial Times, April 26, 2010.
8. New York Times, May 9, 2010.
9. New York Times, June 27, 2010.
10. “The Mother of All Bubbles,” Spiegel Online, May 3, 2010.
11. “The G-20’s Dead Ideas: Why Fiscal Retrenchment is the Wrong Response to the Crisis,” by Mark Blyth and Neil K. Shenai, Foreign Affairs, July 9, 2010.
12. Aneurin Bevan, In Place of Fear (1961), p.40.