Cooking the Books: The Gnomes of the Market

THE EUROZONE is an economic area in which 17 different countries have agreed to use a common currency, both internally and externally. In the years between 2002 when it was introduced until the crash of 2008 the economies of these countries were growing and investors (largely banks) were prepared to lend the governments their money to cover their budget deficits by purchasing their bonds. They took the view that their money was safe as the governments would be able to pay the interest and repay the loan out of future tax revenues.

The crisis upset this as economic growth, and tax revenues from it, fell. Some Eurozone countries had borrowed an amount that was higher in relation to their GDP than others and so were harder hit. They are now denounced in the financial pages of the press (generally more favourable to creditors than debtors) for having been “profligate”.

Creditors began to fear for the repayment of their loans and brought pressure to bear on the governments concerned by refusing to lend them more except at higher, penal rates of interest. They have gone farther, making it a condition for future lending at lower rates that the governments cut their spending so as to have the money to repay any loans. They picked off the governments one by one: Ireland, then Portugal, then Greece; and now Italy, with Spain and even France possibly next.

All this has been done impersonally through “the markets” but not the less effectively for that. The debtors are not entirely at the mercy of the creditors because they always have the nuclear option of bringing the whole house down by defaulting; in which case the creditors would lose all or most of their money.

So creditors have an interest in not pushing the debtors too far and in coming to some arrangement which will ensure that they get most of their money back, eventually.

These negotiations have taken place through governments (rather than being left to “the markets”) and have resulted in the holders of Greek government debt agreeing to being repaid over a longer period and even to a “haircut”, i.e. the writing off of some of the debt.

Critics of the euro have gleefully shouted “we told you so”. Here for example is the Times on 7 November: “Greece’s crisis might have been a localised problem rather than a continental threat, but it has been aggravated by the common currency. It has also been rendered more difficult to resolve owing to the inability of weaker Eurozone members to devalue their currency and thereby secure an adjustment in living  standards.”

A downward adjustment, that is. Depreciating a currency (these days by letting its value float downwards rather than a formal devaluation as in the days of fixed exchange rates) leads to imports costing more, so reducing living standards that way.

Despite the political rhetoric, it is not certain whether the British capitalist class really wants a return to a situation where some of its major European competitors, France, Italy, Spain, would be free to let their restored national currencies float downwards, so making their exports cheaper. One of the reasons Britain stayed out of the euro was precisely to retain the flexibility to do this, knowing that their competitors couldn’t.

The Times admits that Greece would still have had to reduce living standards even if it hadn’t been in the euro. So, it’s a question of damned if you’re in the euro and damned if you’re not. In other words, it’s not being in the euro that’s the problem, but being in a capitalist world. After all, Britain is not in the euro but the government is still having to impose austerity.