Eurozone Crisis is Self-Inflicted

The current turmoil in financial markets around the world
is another illustration of the damage that can be done by a bloated and
politically powerful financial sector, combined with finance ministers
and central bankers who identify with this sector and have their own
rightwing policy agenda.

Welcome to Europe, which has become the epicentre of the new global "financial crisis".

On Tuesday, the focus of Europe's troubles shifted somewhat from Greece to Spain.

At
first glance it's not obvious that there should be a crisis in Europe
at all. Even if Greece were to default on its debt - and this would
most likely be a rescheduling or a restructuring rather than a
large-scale cancellation of the bulk of Greece's debt - this would
involve a relatively small amount of money compared to the resources
that the EU has available to bail out any affected banks. And Spain's
debt is much smaller, relative to its economy, than that of Greece:
it's about 60% of GDP, well below the EU average of 80%.

But "the
markets" have decided that Spain is next in line for attack, and so the
price of credit default swaps - a type of insurance - on their debt
shot up today. If this sentiment grows, Spain's interest rates will
continue to rise, and then their debt burden really could become
unsustainable.

To make it worse, "the markets" can't seem to
decide what they want from these governments in order to love them
again. Two weeks ago the euro
was plummeting because the financial markets wanted more blood: they
wanted Greece, Spain, Portugal, and the other currently victimised
countries of Europe (Italy and Ireland) to commit to more spending cuts
and tax increases. Then they got what they wanted, and within a day or
two, the euro started crashing again because "the markets" discovered
that these pro-cyclical policies would actually make things worse in
the countries that adopted them, and reduce growth in the whole
eurozone.

Unfortunately the European authorities - especially the
European Central Bank - are even worse than the markets. They are less
ambivalent and more committed to punishing the weaker economies by
having them cut spending even if it causes or deepens recession and
mass unemployment (over 20% in Spain).

It will be recalled that
the turmoil in financial markets took a big turn for the worse on 6 May
when the European Central Bank announced that it was not going to
engage in "quantitative easing" - creating money - in order to help
ease the crisis. They reversed their decision, but only partially. And
the agreement reached for the so-called "trillion dollar bailout"
requires that any country borrowing the funds must agree to more
austerity. This means that if a country like Spain does run into
trouble due to increased borrowing costs, tapping the "bailout" funds
will force them to accelerate a downward economic spiral. And where is
the inflation that the ECB is worried about? The eurozone is projected
by the IMF to have 1% inflation for this year and 1.5% next year.

Imagine how much worse the United States
economy would be today if, instead of responding to our recession with
fiscal stimulus, near-zero interest rates and a doubling of the Fed's
balance sheet, we had opted for budget cuts and tax increases. That is
what the European authorities are advocating for the weaker eurozone
economies.

The Greek population
refuses to accept these conditions, and understandably so. The upper
classes in Greece don't pay their taxes, and now the majority are being
forced to pay the price for their cheating - a price greatly magnified
by the irrational, pro-cyclical nature of the adjustment. Unrest is
growing in Spain as well, with the largest unions talking about a general strike.
There is a class dimension to all of this, with the EU authorities and
the bankers united in wanting to balance the books on the backs of the
workers - and adopt "labour market reforms" that will weaken labour and
redistribute income upward for generations to come. The EU authorities
and financiers believe that real wages must fall quite sharply
in these countries in order to make them internationally competitive -
but the protesters are responding with a fiscal version of "No justice,
no peace".

They might add: "No justice, no euro." From the
beginning there have been serious economic questions about the
viability and the desirability of the common currency - most
importantly whether such a currency union was feasible among countries
with greatly different productivity levels, no common fiscal policy,
and a Central Bank committed only to maintaining very low inflation
(without regard to employment). The populations now suffering under
EU-imposed austerity must have a real and credible threat to get out -
or they will end up with indefinite sacrifice for the reward of lower living standards.