In the ongoing war between international finance capital and the citizens of the world, it is remarkable how many recent battles finance has won. Recent events have shown how economic policies of governments and the socio-economic rights of citizens in both the developed and developing worlds are increasingly hostage to the whims of financial markets, based on fear of the havoc they can create. Even more than before, the world seems to be enslaved by finance.
Just a year ago, this would have seemed next to impossible. Financial markets were on their knees, decimated by the collapse of a boom based largely on the irresponsible and often dodgy activities of their own agents. The collapse of the sub-prime boom and the subsequent unravelling of major institutions had revealed just how misleading the arguments of the proponents of efficient, self-regulating markets could be. Banks and other large institutions had to be bailed out at enormous public expense, forcing taxpayers to pay for the past and current sins of bankers.
Even now, public attitudes in Western countries towards financial players, especially the managers of big banks, are very negative. They are treated with a mixture of fear and loathing, with the latter especially marked as they continue to treat themselves to large bonuses notwithstanding the economic devastation all around them and the explicit and implicit guarantees of states. But now fear seems to be more accentuated than loathing, as once more economic policies and material conditions of citizens are being determined by the need to sustain or revive “investor confidence” in the financial markets. And the implications of such objectives, which were earlier experienced mainly by developing countries, are now being felt in the centres of developed capitalism as well.
Consider the events of the past week in Europe alone. The government of Greece is being forced to implement the most extreme austerity measures, which are bound to cause a collapse in economic activity and employment that can persist for a very long time, all in return for an emergency loan package from the European Union and the International Monetary Fund (IMF) that will involve the country remaining indebted over several generations.
The heavily-indebted poor countries (HIPCs) of Africa could tell the Greeks a thing or two about this process. They could tell them how the deflationary measures that are imposed on governments cause economic activity to go into a downward spiral that destroys existing capacities and prospects for future growth, and pushes large sections of the population into a fragile and insecure material existence. They could tell them about how it is fundamentally unsustainable, because the downslide in gross domestic product (GDP) makes it ever harder to service the debt, which in turn keeps not only piling up but even expanding because of the unpaid interest that keeps getting added to the principal and then compounded, so that the country’s debt just keeps rising even with no fresh inflows. They could tell them how ultimately there will be no alternative to restructuring the debt, because the problem will only grow in magnitude even with (and partly because of) the most stringently applied austerity measures. They could tell them about their own experience of several lost decades of economic retrogression, which could have been avoided had the debt restructuring taken place much earlier and a different set of policies for economic recovery been pursued.
This experience of so many developing countries should have provided the obvious lesson: that there is no alternative to a major restructuring of the Greek debt involving quite a large haircut taken by lenders who did not exercise due diligence in the act of lending in the first place. If it does not happen now, it will in any case have to happen some time in the future, after creating a great deal of material distress in Greece.
Why is such an obvious conclusion not even being talked about? Essentially because the power of finance — in politics, in media and in determining national and international economic policies — remains so strong. A restructuring of the Greek debt would involve the German and French banks who lent extensively during the boom (and helped to create the imbalances that have made the Greek economy less competitive than that of Germany, for example) taking large losses. This cannot be allowed to happen, so the burden of adjustment is placed entirely on the Greek people, for several generations.
It gets worse. Other countries that are seen to have potential problems like Greece are already moving towards austerity measures and contractionary macroeconomic policies that are bound to threaten the frail economic recovery and engender or intensify the next recession. Spain has just announced not only tightening of monetary policies, but fiscal contraction involving cuts in public sector pay and pensions and much else. This is particularly remarkable because until two years ago Spain ran a fiscal surplus (the deficit was because of the private sector) and its recent deficits are entirely a result of the crisis.
Ireland is already undergoing the most extreme deflationary package involving significant decline in GDP and slashing of public expenditure in all sorts of areas from physical infrastructure to education. The Baltic countries, not only Latvia which has an IMF programme but Estonia where the pain is self-inflicted, are experiencing dramatic declines in incomes, employment and wages because of their severe austerity packages. In Romania there was the remarkable spectacle of policemen taking to the streets to protest against their wage decreases. And so on.
Even in the United States, where a large fiscal package was introduced to offset the slump generated by financial markets, pressure is on the US government to reduce the deficit to meet the demand from both media and the self-same markets. Commentators are being forced to write pieces showing that “the US is not Greece”!
It seems as though the whole world has gone mad, but it is social madness in a broader form, which is enslavement to finance. This is evident even in the latest IMF prescriptions, which also call for deficit reduction. Their chosen methods for this are cuts in public spending and increases in indirect taxation (value added tax and excise duties), which fall dominantly on the poor and on wage incomes. There are no suggestions for taxes on capital, even the same finance that has benefited from large publicly funded bailouts and is now holding to ransom the hands that have fed them.