Varieties of imperial decline - the failure of Europe

It is difficult to overstate the slyness, arrogance and cynicism of the economic and political leadership of the Western Bloc countries in North America, Europe and their Pacific allies. Their economic, political and moral betrayal of their peoples has been definitive. For the rest of the world, the main concern is how much global military destruction the Western Bloc ancien regime will inflict as it seeks to mitigate its inevitable decline.

The United States and the European Union teeter in and out of recession. Their peoples have experienced sharp increases in inequality and poverty. Meanwhile, Latin America makes steady economic progress, reducing poverty and inequality, consolidating its political and economic autonomy. On almost every measure, the leadership of progressive countries of Latin America – in particular the countries of the Bolivarian Alliance of the Americas (ALBA) - has been categorically vindicated.

The nature of the economic crisis

The power of the West's financial markets and institutions derived from hundreds of years of savage imperial domination over Africa, Asia and Latin America. The integrity of the Western financial system was always provisional and relative. Now, the global markets of capitalism are little more than an enormous decrepit casino for the world's corrupt corporate elites.

The great majority of economists and financial journalists over the last twenty years have been faithful accomplices and apologists of the Western financial institutions. Only a tiny handful predicted the collapse that began in 2007 or criticized its fundamental origins. However, understanding what has happened is very simple and obvious. NATO country corporate elites will do anything to defend their wealth and power, applying murderous colonial aggression overseas and vicious structural adjustment at home.

These Western oligarchies long ago bought off their governments and political leaders. Together with that fundamental political reality, the essential economic point to understand is this : cheap money + corrupt financial system + no government control = unpayable debt. The current crisis exists in large part because corporate elites are using the governments they have bought to impose the costs of unpayable debt on the peoples of the United States and Europe.

Analysing the crisis

The balance sheets of major Western financial institutions and central banks do not give a true and fair view of their financial state. Central banks have accepted as collateral, against loans to prop up their respective countries' banks, assets nominally worth hundreds of billions whose real market value is impossible to know. Major financial institutions cannot give trustworthy valuations of their assets and liabilities.

They cannot do so because, for example, their balance sheets have been manipulated by the use of so-called Special Purpose Entities. A Special Purpose Entity is an accounting ploy to remove potential risk and losses off corporate balance sheets. That means financial institutions can pretend they are sound when in fact they may be insolvent.

Another reason the balance sheets of major financial entities are untrustworthy is because the valuations they offer of their assets and liabilities are opaque. It is impossible to know the value of asset backed derivatives, for example, when the markets for those assets are dysfunctional. The dishonest accounting that contributed to the start of the economic crisis in 2007 continues today.

That is a fundamental reason for the problems of interbank lending. Trust and confidence have evaporated. Internationally, money markets, bond markets and commodities markets have been comprehensively distorted via massive intervention and rigging by central banks and their corporate partners. The recent London Interbank Offered Rate (LIBOR) scandal was just the latest example of systematic market corruption.

The banks involved rigged Libor – a benchmark for global interest rates – so as to prevent huge losses and make huge profits in international markets for complex derivatives, swaps and bonds. Attention has been diverted from the crucial role private banks have played in helping central banks maintain low interest rates. Manipulation of the bond and credit default swap markets have been critical in preventing interest rates on global debt from exploding.

Just weeks prior to the Libor scandal appearing in the international news headlines, US courts sentenced low-level traders to prison terms for their role in deliberately rigging bids in the multi-billion dollar US municipal bond market. Like the Libor scandal, that criminal activity involved several big US investment banks and many major foreign investment banks as well. Across the United States, municipal authorities were bilked of billions of dollars, compounding their already difficult fiscal position as a result of the long drawn out economic recession.

The collapse of the Western financial system stems from a political failure to resolve the economic problems caused by massive unpayable debt. That debt resulted from an unprecedented credit boom in the Western Bloc countries' financial and property sectors. Any credit boom always ends with widespread unpayable debt. The recent origins of the latest, most spectacular credit boom ever were several.

Wholesale financial deregulation from the mid-1990s onwards was accompanied by corporate-friendly laxity in the application of accounting rules, for example as noted previously, in relation to Special Purpose Entities. These figured prominently in the Enron scandal of 2001 from which only the criminal financial classes learned anything. Corrupt accounting was compounded by byzantine financial innovation, especially in relation to Structured Investment Vehicles and Credit Default Swaps.

These kinds of transactions obscured value and confused investors. Credit Default Swaps allowed private speculators to make insurance bets on assets they did not even own. Much of this so called “innovative” financial activity took place in completely unregulated over the counter transactions, by-passing even the weak supervision present in international markets. These transactions themselves were based on a completely insufficient capital base.

That insane context was justified by arguments that risk was effectively being eliminated because it was spread so widely across the global financial system. The stunning idiocy of that argument – because spreading risk means spreading its contagion - went unnoticed. It encouraged corrupt valuations, epitomized by ratings agencies paid by the very same corporate clients they evaluated.

At the same time, reckless deregulation allowed the fusion of traditional banking with investment trading. That promoted an out-of-control shadow banking system promoting deliberately unsustainable loan origination. The tremendous ensuing credit boom was exaggerated even further by the US Federal Reserve holding interest rates below inflation for years. The fundamental equation stands : cheap money + corrupt financial system + absent government regulation = unpayable debt.

What should frighten ordinary people in the United States, Europe and the countries of their Pacific allies is that nothing has changed. The inherent systemic criminality and corruption of corporate capitalist financial culture is exactly the same as it has always been. It is absurd to expect Western governments to confront the very oligarchies that have bought them.

Political Origins

The fundamental origin of the Western Bloc's current intractable debt problems is political. The current crisis of corporate consumer capitalism was set off by the ideological triumphalism of advocates of corporate “free market” consumer capitalism at the break-up of the Soviet Union. That moment consolidated the subordination of industrial and commercial activity to finance interests in the economies of the Western Bloc countries, in particular the United States and Britain.

From the mid 1990s onwards, real incomes for ordinary people grew less and less, finally becoming almost completely stagnant over the last decade. Most people came to depend on credit to sustain their unsustainable consumer lifestyle. But that dependence by the general population could only last as long as did the credit-driven over-valuation of assets, especially in Western property markets.

Once the false asset valuations collapsed, the long drawn out credit boom melted into an intractable swamp of unpayable debt. To understand the level of dependence on credit of the general population in the US and Europe, one should note that the median US household income in 1990 was US$48,423. By 2010, that same figure was just US$49,445, having peaked in 1999 at US$53,252. Consumer price inflation during that same period in the US averaged 2.73% annually.

For the Eurozone - the 17 Western European countries that use the Euro as their money - OECD data indicates that from the late 1980s to the late 2000s, median disposable household income, corrected for inflation rose, just 1.6%. The OECD data indicates that the corresponding figures for the US and Japan are 1.3 and 0.3 respectively. The reality experienced by the majority of people in these countries is certainly understated by the statistics. But they certainly explain the massive increase in household debt in the United States and Europe in the years following 2000.

The Federal Reserve Bank of San Francisco economic letter of January 18th 2011 noted,“After a steady increase from 1950 to 2001, the household debt-to-income ratio skyrocketed from 2001 to 2007 by more than it had in the prior 45 years. ....The ratio of housing-related debt to housing wealth peaked at 65% in 2009, which was 25 percentage points higher than at any time since 1950 .” That US experience was replicated across Western Europe. Almost everywhere, property markets and speculative investment fuelled the creation of unpayable debt.

Europe less flexible than the US

European countries that adopted the Euro as their currency in 2001 are experiencing even more intractable economic problems than the United States. Of the 27 member countries of the European Union, 17 make up the Eurozone comprising about 330 million people. Outside Europe, in colonies and dependent territories as well as 16 former French colonies in Central and West Africa, another 175 million people either use the Euro or currencies whose value is fixed to the Euro.

Countries that adopted the Euro cannot use sovereign economic measures like currency devaluation or changes to interest rates to protect their economies from problems created by private and government debt. It is the European Central Bank that issues currency and sets interest rates. The ECB is independent of the European Union's political institutions. This means that European Union governance is broken. An inherent mismatch exists between monetary policy and fiscal policy.

So the debt of Eurozone member countries is in effect denominated in a foreign currency with interest rates over which they have no control. As many economists have pointed out, the European Central bank cannot finance European countries' public sector deficits. That fundamental flaw in the design of Europe's institutions again has its origins in the demonstrably failed neoliberal monetarist ideology of the 1980s. The European Union was created by the Maastricht Agreement of 1992, the high tide of neoliberal triumphalism.

Europe's dominant ideologues believed controlling the money supply and interest rates was sufficient to guarantee economic stability and prosperity. They tried to correct that false belief when, in 1997, the governments of the European Union agreed on a protocol to the 1992 Maastricht Agreement. The protocol was called the Stability and Growth Pact. This agreement was supposed to protect Europe from economic crisis by forcing governments to abide by sound economic policies.

The Stability and Growth Pact set strict limits for economic benchmarks like inflation, fiscal deficits, long term interest rates and the proportion of debt to Gross Domestic Product. By 2003, both Germany and France were in violation of the terms of the Pact. Under pressure from Germany in particular, in March 2005, the EU’s Economic and Financial Affairs Council (ECOFIN) relaxed the Stability and Growth Pact rules in the face of criticism that they were too strict to enforce.

This relaxation of the Stability and Growth Pact made it possible for Germany to sustain its export-led growth by running trade surpluses at the expense of poorer, less competitive countries like Greece. Germany benefited from the European Union's inherent imbalances between member states in order to sustain its own relative prosperity. It is completely hypocritical of German political and economic leaders to complain now, as they do, about levels of indebtedness which they themselves provoked to Germany's advantage.

The developing crisis

This background explains why it is entirely fair to describe the West's political and corporate leadership as stupid and arrogant. They pretended to know things they did not know. They have compounded that incompetence with sly, cynical manouevres to make their own countries' peoples pay the cost. This reality is very clear from a brief look at the countries worst affected, Ireland, Greece Portugal, Spain. Very soon, Italy will be in similar crisis as well.

When, at the end of 2008, Ireland's government originally offered a guarantee to the country's banks, heavily indebted to British, German, French and US banks, Ireland's political and financial leadership had to sell that measure to the public. With brazen deceit, they suggested that Irish banks had cash flow problems involving not more than perhaps €4bn. In fact, as events through 2009 proved, Irish banks were liable for well over €100bn.

In 2010, the Irish government had to ask the European Union, the European Central Bank and the International Monetary Fund to help with a rescue. Recent estimates put the debt of Ireland's banks at around three times Ireland's GDP of around €260bn. As has always happened in the past, people in Ireland have responded to the crash in their economy by emigrating.

In Greece, the developing crisis finally broke in 2009 when the government confirmed a fiscal deficit of over 13%. By 2011, the country owed over €320bn. In the case of Greece, the problem derives fundamentally from public sector deficits caused by many factors which were all exacerbated by the 2005 relaxation of the Growth and Stability Pact. Over the last fifteen years Greece and Portugal have both had higher ratios of debt to GDP than other European countries including Spain and Ireland.

The debt crisis for Greece and Portugal stems from that accumulation of high fiscal deficits. In Spain and Ireland the debt crisis is due to the government bailouts of their corrupt banking sectors. But in all cases the downgrading by markets of all these countries' credit ratings increased their debt problems. They incurred very high interest on new debt bought to pay off previously accumulated debt.

Spain

Most people in Latin America are particularly interested in what has been happening in Spain. Spain's crisis resulted mainly from banks lending recklessly for property and financial speculation. The Indignados movement and protests like the recent miners' march express ordinary people's anger that the government is rescuing the banks while unemployment in Spain is over 25% in general and for young people around 50%

The Spanish government insisted that it would never require a financial rescue package. But in early June 2012, it formally requested the European Union to provide a loan of up to €100bn (10% of the country's GDP) to rescue the country's banks. The debt will be repaid by the Spanish government. In effect the Spanish government has done what Ireland did towards the end of 2008, assume responsibility for the debts of its banking sector.

In both cases that move shifts private debt into the public sector dramatically expanding the country's indebtedness. This exposes the country to speculative attacks in the international bond markets. That level of indebtedness also makes more likely intervention by the International Monetary Fund and by the European Commission.

Under the government of Mariano Rajoy, the elite classes in Spain, as in the other European countries, are attacking living standards of workers, driving down wages and benefits. At the same time, the tax system shifts the burden of government indebtedness onto ordinary people via indirect taxes like VAT which Rajoy has hiked now to 21%. These measures exacerbate the already serious economic contraction.

Rescuing the banks is justified on the basis that the banks will then regenerate economic activity. Experience in the US and elsewhere has shown this is not so. Like the US and elsewhere, Spain is undergoing sharp debt-deflation. Most people and businesses are paying down debt. The banks themselves are capital impaired in a way that may well make it hard for them to rebuild their balance sheet even with the massive rescue.

Banks will not lend because suitable clients for loans are not available and most people and businesses do not want to incur more debt. The Spanish economy will not respond to bank rescues any more than the US or Japanese economies have. Banks will take the rescue money and gamble it in international money, commodity and bond markets.

The crisis in Spain will certainly get much worse. In mid-July, the region of Valencia appealed for government support. Six other Spanish regions are likely to follow suit soon : Andalusia, the Balearic Islands, Catalonia, Castilla-La-Mancha, Murcia and the Canary Islands. Over the next year or so, Spain is certain to need at least another €200bn to address an economic crisis that the bank rescue only exacerbates.

The bank rescue does nothing to solve Spain's fundamental problem of unpayable debt. In fact, the rescue of the banks in Spain, as in the US, Britain and Ireland is necessary to perpetuate the dominance of the Western financial system. That financial system is a vital component of United States and European global power and influence. It depends on the intimate collusion of its major corporate financial entities with central banks to control global money, commodity and bond markets.

Responses and solutions

As in the US, European prosperity over the last twenty years was based on debt. Depressed wages increased corporate profits, systematically increasing inequality. To redress the loss of people's purchasing power, the financial sector encouraged mass indebtedness. That made it possible for people to buy the proliferation of goods resulting from the expansion of corporate investment.

That investment was possible thanks to the exorbitant profits derived from the global low wage economy. The debt crisis was caused by worsening chronic imbalances in the distribution of global wealth. These caused increasing inequality and the consolidation of the power and wealth of corporate elites.

Bank rescues completely fail to address the underlying problem of unpayable debt. In fact, the debt crisis has been made worse by the rescue of the West's criminal financial sector. Bank rescues have turned the banks' own insolvency dilemma into a debt crisis of governments sovereign only in theory.

In practice, governments have been pressured by oligarchic corporate élites into rescuing their countries' banks. The rescues have saved major players in the West's financial system who would suffer massive, probably unsustainable losses, if banks in Ireland, Greece, Portugal and Spain were put into receivership. Putting the banks into receivership while protecting ordinary depositors was always the obvious solution to the problem of unpayable debt.

But, to protect the power and wealth of the West's corporate elites, it was not adopted. Now the banks' insolvency has been turned into a sovereign debt crisis. Countries are faced with the alternatives of seeking greater economic growth or defaulting on their debt. Adequate growth is unattainable under current conditions. So default seems to be a likely, if unwelcome, outcome.

In fact, a confused mixture of outcomes is likely. All through 2012 capital flight in affected countries, Greece, Ireland, Portugal, Spain and Italy has provoked bank runs leaving many banks insolvent. It is only a question of time before that process begins to affect the wealthier European nations, including Britain, France and Germany.

The European Union is completely unable to address the crisis in a substantive, effective way. Its initial response to the development of the sovereign debt crisis in Ireland and Greece was to set up the European Financial Stability Facility in May 2010. But the EFSF is nothing more than a Special Purpose Entity designed to keep risk and loss off the balance sheet of the European Central Bank.

This measure on its own indicates the deep ideologically-driven stupidity and arrogance of the leaders of the European Union. To address the crisis of unpayable debt they used precisely the kind of mechanism that provoked the global crisis in the first place. Predictably, that conceptual failure turned out only to have postponed matters.

Now in 2012, the European Union is trying to set up yet another bailout fund. They are calling this one the European Stability Mechanism. But this fund depends on approval from the European countries' legislatures. That approval is currently being held up in Germany, effectively Europe's lender of last resort, due to a constitutional legal challenge.

The uncertainty generated by such developments in Europe is exacerbated by the chronic breakdown in interbank lending and the fact that bank lending in European countries now generally ignores the interest rates set by the European Central Bank. Banks tend now to set their interest rates in accordance with the conditions prevailing in their respective countries based on constant fear about future ability of clients to repay their loans.

This reality indicates how far the multiple failures of the European Central Bank have contributed to a developing de facto breakdown of, perhaps not the European Union iself, but certainly the Eurozone. Another sign of that breakdown is the increasing use of the Emergency Liquidity Assistance programme to support banks that do not qualify for help from the European Central Bank. This programme is essentially a back door permitting national states to use government support to help national banks.

Both in the United States and in Europe, the Western oligarch elites have reached a dead end. They are desperate to defend their wealth and power. Domestically, they are applying economic sanctions against their own populations. Overseas they are trying to aggressively recolonize countries in Africa and the Middle East. In Latin America, they have ratified yet another fraudulent election in Mexico and the coup in Paraguay.

Western democracy was always a myth. It has not died, because it never existed. The fairy tale of efficient free market capitalism has reached its entirely predictable unhappy ending. It remains for the peoples of Latin America, Africa and Asia to create stable global prosperity and peace via solidarity-based cooperation and complementarity. They do so facing vicious opposition from the murderous, genocidal terrorist regimes of the United States and the European Union.

ENDS

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