What if debt deflation strikes, will the Eurozone’s financial elite still bay for sound finance?

Finance capital’s imposition of fiscal austerity on both sides of the Atlantic – and this at a time when private consumption and investment are stagnating – is pushing the developed capitalist world into double-dip recession. As it is, the short-lived recovery has been a “jobless” one. The top dogs at the annual gatherings of the World Bank and the International Monetary Fund (IMF) in Washington at the end of September, and a meeting of the central bankers and finance ministers of the G-20 countries on the sidelines of the Fund-Bank conclaves, stared into this abyss, expressed concern, and (the G-20) promised strong action to ensure financial stability and go on with fiscal consolidation.

Banks and other financial institutions in Europe that are heavily exposed to Greek, Italian, Portuguese and Spanish government debt are tottering as the interbank credit market is beginning to

freeze as it did when Lehman Brothers collapsed three years ago. Predictably, an expansion of the European Financial Stability Facility (EFSF) – the stabilisation fund for the Eurozone’s government bond markets set up in May last year – is in the pipeline. But it will not come without greater fiscal austerity and privatisation imposed by the so-called Troika – the European Commission, the European Central Bank, and the IMF – in Greece, where the crisis is full-blown. But is Greece’s “excessive” fiscal deficit really the problem? Or is it the Eurozone’s institutional design that makes the financial markets the arbiters of the public debt? Where is all this leading to? Debt deflation? Democracy imperilled?

The main “player” here is Germany. The euro had enabled German capital – with its innovative capital goods sector and an entente with the trade unions that allowed productivity to rise much faster than the average wage – to prosper via net exports. Weaker neomercantilist powers like Italy, hitherto dependent upon real currency devaluation, were now sidelined. France, even if it did have neo-mercantilist ambitions, could not contemplate competitive devaluations because of the dominance of financial capital over its industrial counterpart in the French economy, and so it pitched for the euro, hoping that it would thereby gain some control over Germany’s monetary policy. In the wake of the US financial crisis, German net exports to the US and investments in the US financial markets suffered, and post-2008, Germany has had to harden its neo-mercantilist stance and enforce the rules of the game in the Eurozone. Moreover, Berlin is also focusing on its eastern periphery – Estonia, Latvia, and Lithuania, as also Hungary and Slovakia.

This is where German finance capital would like to allocate more of its portfolio; it is also where the foreign direct investment of German transnational corporations is presently focused in their bid to restructure and sustain their competitive advantage. Nevertheless, with Paris and Washington together demanding a huge expansion of the EFSF, we think that Germany will pledge the required monies for the EFSF. But will this infusion placate the financial markets?

The expansion of the EFSF has to be seen against the background of a deepening of the fiscal austerity imposed on countries like Greece, Portugal, Spain and Italy, with the French too moving

towards a balanced budget. It also has to be viewed in the context of the integration of financial markets in the Eurozone where French, German and Dutch banks hold Greek, Portuguese, Spanish and Italian government bonds. These transnational banks exert pressure on their respective home governments to ensure that this public debt is refinanced. The Greek, Spanish, Portuguese and Italian governments are, of course, subject to the imposition of strict conditions regarding fiscal austerity and forced sale of public assets (privatisation) by the Troika against the will of the majority of their citizens. Huge layoffs and reduced wages and pensions of Greek public sector employees have provoked mass protests which are increasingly being suppressed with a heavy hand. Democracy is fast becoming a casualty in Greece. And, with “sound finance” being imposed on both sides of the Atlantic leading to recession and a consequent further deterioration of the “fisc”, state authoritarianism backed by finance capital may assume endemic proportions.

The root of the Eurozone’s problems is its institutional framework – countries that persistently violate the 3% ceiling on the fiscal deficit to GDP ratio and/or the 60% limit on the public debt

to GDP ratio have no other alternative but to borrow short-term on the financial markets because their own central banks are not permitted to refinance the debts by purchasing their  governments’ treasury bonds. Monetary and fiscal policies are thereby completely divorced from one another. The financial markets become the arbiters of public debt. The big question now is: What will happen if Italy’s public debt goes out of hand due to the persistence of economic stagnation? After all, the Italian public debt is bigger than the sum of the Spanish, Portuguese and Greek public debts.

The fiscal austerity imposed on the country will only lead to further economic deterioration and consequently, a further exacerbation of the public debt crisis. What then?