Europe’s Decline and Its Sovereign Debt and Currency Crisis

Reader Jon B writes that I should build on my “analysis of the U.S. empire and the dollar-centered international monetary system by writing on the European debt/euro crisis, the possible outcomes for the world economy, and whether U.S. global domination is likely to be boosted or undercut.”

On November 30, it was announced that the world’s major central banks were extending their “swap agreements” in an attempt to control the growing European credit crisis centered on the “sovereign debts” of European governments. The announcement indicated that the crisis may be coming to a head, and that the U.S. Federal Reserve System stands ready to pump U.S. dollars into Europe in a bid to stave off a full-scale financial panic such as occurred when the Lehman Brothers investment bank collapsed in September 2008.

A few weeks earlier, the Greek government had agreed to a vicious austerity package. The government of Prime Minister George Papandreou, which had briefly threatened to hold a referendum on the austerity package, instead meekly resigned in favor of a so-called “technocratic government” headed by Lucas Papademos, a former vice president of the European Central Bank. The new Greek bankers’ government, in order to broaden its base beyond the bankers, includes the racist LAOS party.

The European leaders, finally admitting that the Greek government couldn’t possibly pay its debts, agreed to a 50 percent write-down of Greece’s bonded debt.

This is similar to what happens when a U.S. corporation goes bankrupt under Chapter 11 of the bankruptcy law. In addition to the corporation getting out of any contracts it has signed with its workers, a portion of its bonded debt is written down. The “reorganized corporation” is then given another shot at making profits for its stockholders and bondholders.

The U.S. media proclaimed that this “agreement” indicated that the European crisis was finally on its way to being resolved—as the media have repeatedly done whenever top European leaders get together and announce “agreements.” They do add, just to cover themselves, that “much still has to be done” to fully resolve the crisis. Nor did the U.S. media—who pretend to support democracy all over the world—hide their delight that a government of unelected bankers had replaced the elected government of Greece.

As if on cue, as has repeatedly happened whenever “agreements” on the European debt crisis have been reached, the global stock markets staged powerful rallies. But the investors in European government bonds were not so happy. They feared that if the bonds of Greece can be written down by 50 percent, so can the bonds of Spain, Portugal, Ireland and maybe even Italy. Instead of easing the crisis, or at least buying time, the November 30 agreement actually worsened the crisis. The rates on government bonds of other European governments began to rise, especially those of Italy, which at one point soared above 7 percent.

Seven percent on Italian government bonds accomplished what repeated sex scandals and criminal charges had not been able to do. It brought down the government of the sleazy Italian billionaire media king Silvio Berlusconi. (1)

The Italian government, too, has been replaced by a “technocratic government,” headed by economist Mario Monti, that is expected to do what the bankers tell it to do. Through the government bond markets that they dominate, the global 1 percent proclaimed that it will be working and middle classes that will have to make the necessary sacrifices if Europe is to emerge from its current crisis. The only “sacrifices” the 1 percent are prepared to make is to make even more profits. After all, isn’t the key to emerging from an economic or financial crisis under capitalism increasing the rate of profit? (2)

Clicking their heels, Europe’s leaders reacted by promising that there will be no more write-downs of government bonds. Instead, they assured the European 1 percent and Wall Street that the full burden of the financial crisis will be borne by the workers and the middle classes, and not only those employed by the state itself.

With virtually all European governments adopting vicious austerity packages in a bid to reassure the bond market and its 1 percent, a European recession now seems all but certain for next year. Indeed, the recession has probably already begun.

If a full-scale banking panic develops, the European recession will be much worse. This is the blackmail that is being wielded by finance capital—the 1 percent—in this crisis, just like it was in the U.S. during the 2008 crisis. Then, too, we heard that unless the banks and their 1 percent owners were bailed out by government funds, a deep recession would hit the U.S. and the whole world. The banks were bailed out and deep recession followed immediately.

In truth, the capitalist system operates in such a way that whenever a major financial crisis occurs, the very rich must always be bailed out in order to avoid deep recession—or if a deep recession cannot be avoided, then an even deeper recession. Very often, like was the case in 2008, the rich are bailed out and a deep recession occurs all the same. But then the media owned by the 1 percent explain that if the rich had not been bailed out, the recession would have been “much worse.”

No doubt the European leaders and their masters in the United States are hoping to limit the European recession, whose immediate cause is the very government austerity policies that are being adopted to protect the profits of the very rich. The U.S. leaders are desperately hoping to keep alive the weak American recovery from the “Great Recession” of 2007-09. The European Central Bank has been intervening in the European government bond market in an attempt to cap the rise of interest rates on government bonds and prevent a general collapse of banking and credit throughout Europe.

If that were to happen, the effects would not be confined to Europe but would spread around the world. Already, there are reports that the previously booming Chinese economy has begun to slow as Chinese exports to Europe and to a lesser extent the U.S. have fallen compared to last year.

Will the euro be devalued?

One thing the ECB—the European Central Bank—cannot do is to allow the exchange rate of the euro to fall too sharply against the U.S. dollar. The European capitalists, including banks, have assets denominated in euros but debts denominated in dollars. The ECB can in the crisis atmosphere create extra euros to meet the increased demand for euros within the eurozone, where the euro functions as the chief means of payment. But on the world market, it is the U.S. dollar and not the euro that is the chief means of payment.

If the euro were to be sharply devalued against the dollar, many European capitalists and banks would face bankruptcy, since they would suddenly need far more euros to meet their dollar-denominated debts. Therefore, any major devaluation of the euro—against gold—would have to be accompanied by a similar devaluation of the dollar in the form of a sharp rise in the dollar price of gold.

Many of the more progressive Keynesian economists, who are genuinely concerned about the terrible impact of mass unemployment with no end in sight, have been urging Washington to further increase its already large deficit spending in order to create jobs. (3)

But the European crisis creates a new complication. If Washington increases its deficit spending, U.S. government bonds will have to be floated on the international capital markets. Assuming that the bonds keep their credit-worthiness—and there is indeed no real chance of a default on the U.S. government bonds denominated in U.S. dollars—these bonds would attract investors at the expense of the bonds of the European governments. That would push up the interest the governments of Greece, Spain, Portugal, Ireland, Italy and maybe even France would have to pay. (4)

This leaves the possibility that the U.S. Federal Reserve will carry out a new “quantitative easing” policy that would flood the world with newly printed dollars—or their electronic equivalent. In theory, if the Federal Reserve can create enough liquidity, the U.S. government could run an even greater deficit without causing a further drop in the price of European government bonds. We will examine the options available to the Federal Reserve to stave off a new global recession next year below.

Europe is again at the mercy of the U.S.

But one thing is certain. More than 65 years after World War II ended in Europe and nine years after the introduction of the the euro—the European common currency—Europe once again finds itself at the financial mercy of the United States.

Not so long ago, there was much speculation in left-wing circles that the euro was on the verge of replacing the dollar as the linchpin of the international monetary system, bringing to an end the increasingly hated dictatorship of the U.S. dollar—and the global U.S. imperialist dictatorship that the dollar system represents. The current crisis has shown that such hopes had little basis in reality.

Deep roots of the European crisis

To understand the current crisis, we have to look at Europe’s development over the last 100 years. Europe has long suffered from the fact that its powerful productive forces have not only outgrown private property—resulting in periodic crises of overproduction—but they have also outgrown the nation states of Europe. The capitalist industries of the various European countries depend on markets, raw materials and above all auxiliary materials—energy—that are located beyond their borders.

At least since World I, the more far-sighted European capitalists have dreamed of a “United States of Europe.” Both Lenin and Luxemburg opposed this slogan. Modern capitalist society is divided not only into oppressor and oppressing classes but also oppressor and oppressing nations. The European powers Britain, France, Germany, Belgium, (5) the Netherlands and pre-revolutionary Russia were and, with the exception of Russia, remain imperialist oppressor countries. In the days before the rise of the American world empire, the oppressing countries of Europe collectively held most of the world’s peoples as colonial or semi-colonial slaves.

Therefore Lenin and Luxemburg pointed out that a United States of Europe, even if it could be achieved by a peaceful agreement among the European capitalists—something that Lenin and Luxemburg did not exclude in principle—would simply create a stronger imperialist entity whose purpose would be to struggle with the United States of America for world domination over the oppressed majority of humankind. There is a historical precedent for this: the unification of Germany around the axis of Prussia that was carried out under the Prussian Chancellor Otto von Bismark in the 19th century.

The struggle for a united democratic Germany

In 1848, a democratic revolution broke out in Germany that among other things sought to unify the many separate German states into a centralized German democratic republic. The movement in 1848 for a united democratic and centralized Germany reflected the fact that even then Germany’s productive forces had outgrown the decentralized state structure that had been handed down from the feudal past.

However, during the 1848 revolution the young German capitalist class took fright and formed an alliance with the feudal elements against the workers and peasants, which led to the defeat of the German democratic revolution. But the need to unify the German states remained an objective necessity. It fell to the Chancellor of Prussia Otto von Bismarck to carry out the program of the 1848 revolution.

But Bismarck carried out the progressive task of German unification in his own reactionary way. For example, the unified Germany that Bismarck created was not a republic but a monarchy based around the Prussian Hohenzollern house. Nor was the system of government of the new united Germany democratic. The chancellor—the prime minister—was for example selected not by the parliament, or Reichstag as it was called in Germany, but by the monarchy. The executive authority—the equivalent of the U.S. presidency—remained in the hands of the crown.

Nor was there a democratic land reform under Bismarck. Much of the agricultural land remained in the hands of the “great” semi-feudal Prussian landlords called Junkers. These landlords formed the backbone of the (in)famous Prussian militarism that dominated the united Germany. In addition, some German states—for example, Bavaria—retained their own monarchies. Imagine if New York state had a royal house headed by a reigning king along with the kings of California and Texas!

Bismarck’s unification of Germany was incomplete in other ways as well. The German state had a decentralized federal structure. Most importantly, the most powerful German state next to Prussia—Austria—was left out. (6) Instead, Austria, dominated by the German nationality, retained its own empire through which the Austrian German nationals oppressed the many non-German nationalities that made up Austria’s empire.

Despite all these shortcomings, Bismarck’s unification of Germany enabled it to take its place among the other “great powers” of Europe—Britain, France and Russia.

The champions of a United States of Europe were hoping to repeat Bismarck’s accomplishment of unifying Germany by reactionary means on a higher level. Under the hoped-for United States of Europe, the whole reactionary capitalist-imperialist structure—along with Europe’s still numerous monarchies (7) and other feudal remnants like state churches and titled aristocracies—would be retained.

But some sort of pan-European government would be set up that could stand up to the emerging superpower of the 20th century, the United States of America. Therefore, the slogan of a United States of Europe was already a century ago very different from, for example, the current struggle of the oppressed Arab nation to unify the Arab world.

If such a unification were to be accomplished, the Arab nation would control its own natural resources, above all oil. Instead, today we have the Arab oil monarchies and sheikdoms exchanging non-renewable oil for the luxury consumer goods that allow the kings and sheiks and their extended families to enjoy a living standard that matches that of the 1 percent of U.S., Europe and Japan, while the Arab peoples live in great poverty and their economies stagnate. (8)

In most of Europe—with the exception of the Russian Empire—the era of democratic revolutions ended even before the turn of the 20th century. Since then, the only way to unify Europe on a truly progressive basis is under the leadership of the European workers allied with the rest of the world working class, the Arab nation and other oppressed nations and peoples of the world.

As it turned out, the European capitalist class proved incapable of even throwing up a 20th-century European version of Bismarck. Instead, it fell to Europe’s most industrially dynamic country, the very unified Germany that Bismarck had created—to on two occasions attempt to unify capitalist-imperialist Europe by force at the expense of the non-German peoples of Europe. One was during World War I, and the second was under the Nazis during World War II.

By 1945, the Germans had succeeded in making enemies out of all the other peoples of Europe. The unspeakable crimes of German fascism against the other European peoples enabled the United States to play the role of “liberator” of the Europeans from the yoke of German fascism. The horrid experience of the “Third Reich” made one thing clear: As long as the European workers submit to the rule of the European capitalist class headed by Europe’s 1 percent, the Europeans will remain unfit to rule themselves.

In the wake of the “Third Reich,” the unification of Europe was taken out of European hands altogether and fell to the American world empire. America “unified” Europe in two stages. The first stage occurred in 1944-45 when Western Europe was “liberated”—that is occupied—by the U.S. armed forces. In 1949, the U.S. occupation of Western Europe that was supposed to last for only a short time was made permanent through the NATO “alliance.” NATO became the real central government of Western Europe.

America said to the Europeans, beginning with the defeated Germans but then extended after Suez in 1956 to the “victorious” British and French as well—we will allow you access to our home markets, though as a sovereign state we Americans will do so on our own terms. We will also allow you access to the markets of the “free world” outside the United States that we protect, though again on our terms.

Above all, we will allow you access to Middle Eastern oil stolen from the Arabs, Iranians and other Middle Eastern peoples. In exchange, we expect you to support our world empire including supplying troops to fight the wars of the empire against peoples that dare to defy our empire’s authority. This was basically the deal offered to the defeated Japanese as well.

Then, starting in 1989 with the return of capitalist rule to Eastern Europe and Russia, NATO-American rule was extended to Eastern Europe and into what had been the Russia Empire before 1917 and after that the Soviet Union. The U.S. world empire was now brought to the very borders of Russia itself. The leaders of capitalist Europe proclaimed that with the continent west of the Russian border now under the effective rule of NATO, a new era of permanent peace, prosperity and progress had dawned.

This new era of European unity was to be crowned by a common currency, the euro. The euro began as a bloc of fixed exchange rates and a money of account in the 1990s. In 2002, the new European Central Bank introduced its new euro currency complete with its colorful multi-size banknotes—inconvertible into gold, of course.

In my piece on the U.S. Federal Reserve System, we saw how in the 19th century the struggle for a truly united, independent (of Britain) North American union went hand and hand with both the struggle against slavery and a unified national currency. A unified U.S. currency was finally achieved under the National Banking System created by the administration of Abraham Lincoln during the U.S. Civil War against the British-backed, slaveowner-led rebels.

In Europe, the unified currency—the euro, which is now used in 17 European countries—emerged in the opposite way. There is no real European central government except for NATO. The so-called European Union, complete with its powerless parliament, is at best a satellite of the United States. Even the somewhat “independent” foreign policy pursued by France beginning with Charles de Gaulle and continued under both Socialist Party and conservative French administrations has now been dropped by the current French President Nicholas Sarkozy.

“Sarko,” as he is nicknamed, has put the French armed forces back under the command of NATO. Sarkozy has been a strong supporter of the State Department line—especially when it comes to anything to do with the Middle East and oil! Under Sarkozy, the French armed forces under NATO command participated in the U.S.-NATO war against Libya. Now Sarko is enthusiastically supporting the U.S.-led campaign to bring down the government of Syria—which just happens to be a former French colony.

Working within the framework of the American empire, French imperialism is eager to get Syria and its former colonies in North Africa back under its influence.

The euro and European sovereignty

In reality, the euro has actually undermined what little autonomy the governments in Europe had from the United States in the wake of World War II and then Suez. Why is this so? The ability to issue a currency—whether convertible into gold or a token currency that is declared legal tender for all debts public and private—what the economists call today a fiat currency—is a basic attribute of a sovereign state.

For example, the United States of America is a sovereign state and therefore quite naturally issues its own currency, the U.S. dollar. The state of California, on the other hand, despite its great wealth has no right to issue its own currency and is in no way a sovereign nation state. Before the euro, the countries of Europe, like Germany, France, Italy and Greece, had their own currencies. To this extent, they still had the trappings of sovereign states.

But with the euro system, only those countries that have stayed out of the eurozone like Britain—the former number one imperialist power—have retained that right. Instead, the euro is issued by a central bank that is not part of the state structure of any individual European state. Organized as a joint stock corporation, the ECB is formally owned by the central banks of the European Union, which includes the central banks of countries that have not adopted the euro, such as the Bank of England.

The ECB is headquartered in the city of Frankfurt, in U.S.-occupied Germany. It is linked by a thousand and one threads to the U.S. central banking system, and as the current crisis shows, is ultimately subordinated to it.

As the former leading imperialist power, Britain refused to give up its currency—the pound sterling—and adopt the euro. Now Britain has also opted out of the latest European agreement that limits the ability of European governments to borrow—further reducing them towards the status of U.S. states in fiscal as well as monetary matters.

However, even Britain greatly undermined its currency independence when “between 1999 and 2002,” as Wikipedia explains, the then finance minister (later prime minister) Gordon Brown ordered the Bank of England to sell “60% of the UK’s gold reserves shortly before gold entered a protracted bull market, since nicknamed by dealers as [the] Brown Bottom.”

“The official reason for selling the gold reserves was to reduce the portfolio risk of the UK’s reserves by diversifying away from gold. The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.” However, as Wikipedia dourly notes: “By 2011, that quantity of gold would be worth over $19 billion, leading to Brown’s decision to sell the gold being widely criticized.”

Europe as the classical land of the bourgeois nation state

Europe is the classical land of the bourgeois nation state. The many nationalities of Europe—English, French, Italians, Germans, Russians, Poles, Greeks and Serbs, to name only some—are deeply distinct and speak different languages. These nations—not originally in the form of the modern bourgeois nation state—emerged from the ruins of the Roman Empire, which was itself the grave of the ancient nations of the Middle East, North Africa and southern Europe.

During the transition from feudalism to capitalism, the stronger European nations succeeded in creating their own nation states. But there are many antagonisms between nations and nation states of Europe. For example, the French and Germans fought three major wars between 1870 and 1945. The Poles have a deep distrust of both their western neighbor, Germany, and their eastern neighbor, the Russians, both of whom have in the past repeatedly “partitioned” Poland among themselves.

Virtually all European nations have a profound distrust of the Germans—especially since World War II. The English are also viewed with great distrust by the other nations of Europe, not least within Great Britain itself. Great Britain has traditionally consisted of three distinct nations, the English, the Welsh—the original Britons—and the Scots, though it is dominated by the English nation.

In the most recent elections, the party that advocates Scottish independence from England-dominated Great Britain emerged victorious. Further complicating the national question within Britain are dark-skinned people whose families came from the former British empire who do not belong to any of the three traditional nations. The United Kingdom of Great Britain and Northern Ireland—as Britain is officially called—still controls a part of Ireland inhabited by the so-called Northern Irish Protestants, who act as English colonial settlers with no Irish national identity.

The Europeans also have no common language. After several centuries of domination by “the English-speaking peoples,” first in the form of the English world empire and then the American world empire, Europe has de facto adopted English as its common language, much like it used Latin and Greek in earlier centuries.

Germany and the uneven economic development of Europe

The economic development of Europe is very uneven. Britain pioneered industrial capitalism in the 18th and early 19th century. But since the late 19th century, Britain has been in relative—and since the Margaret Thatcher government, in absolute—industrial decline.

Starting in the late 19th century, the most industrially dynamic European country has been and remains Germany. While the post-World War II German economic “miracle” has been over for 40 years, Germany still has one of the most formidable industrial economies in the world. German capitalism was further strengthened by its ability to fully exploit the high skilled and educated labor force of what had been the socialist German Democratic Republic after 1989.

Before the crisis of 2007-09, however, many American economists claimed that the “post-industrial” American and British economies were superior to the German economy, which they pictured as a “backward” industrial economy.

According to these economists, the U.S.-British “model” based on “services,” mostly financial “services”—that is, banking and insurance—was far more stable than industrial Germany. They pointed out that services are far less cyclical than industrial production is. Therefore, they reasoned, the now service-dominated economies of America and Britain would be far more resistant to any economic crisis than the industrial economy of Germany.

However, as it turned out both the United States and Britain were hit much harder by the 2007-09 crisis than was Germany. The industrial German economy proved more resistant to the crisis because Germany was able to lessen the effects of the crisis on its domestic economy by taking a greater share of the crisis-shrunken world market. (9) But who did the German capitalists take market share from? They took it, at least to a considerable extent, from the less-industrialized European countries.

For example, though Italy pioneered the capitalist mode of production as early as the 14th century, modern Italian capitalism has always been far weaker than German capitalism or even French capitalism. The capitalism of Spain and Portugal has been weaker than Italian capitalism, while Greek capitalism and Irish capitalism are weaker still. For example, the Greek economy has been heavily dependent on tourism based on the attraction of the ruins of Greece’s ancient civilization along with its scenic sea coast and islands. This is not a strong foundation on which to build a modern capitalist economy.

When the capitalist economy is in a phase of long-term expansion like it was in Europe in the first several decades after World War II, the strongest capitalists make super-profits while the weaker capitalists make the average rate of profit. But when crisis replaces boom, the super-profits of the stronger capitalists drop to the average rate of profit while the weaker capitalists make losses and eventually either sell out to their stronger competitors or go out of business altogether.

Therefore, while the effects of the crisis of 2007-09 have been relatively mild in Germany, they have been all the more severe in Greece, Ireland, Spain, Portugal and the other industrially lagging countries of Europe.

The crisis of 2007-09 in Europe and the euro system

As we have seen, under the euro system the governments of Germany, France, Italy, Greece and other eurozone countries resemble the governments of a U.S. state like New York or California rather than the U.S. federal government. Neither they nor their central banks have the right to issue their own currency. As I have explained elsewhere, the U.S. government cannot really go legally bankrupt in the sense that it would find itself unable to raise the dollars necessary to pay its dollar obligations—and the obligations of the U.S. government are almost entirely in dollars.

But this is not true of state and local governments in the United States, which have no right to issue their own currency. In the U.S., unlike the federal government, state and local governments are severely restricted in their ability to borrow money and are generally required to balance their budgets on an annual basis. The Federal Reserve System, when it buys U.S. Treasury securities—which since the crisis of 2007-09 have included long-term federal bonds—it takes U.S. central government IOUs and transforms them into U.S. currency, which is declared legal tender for all debts public and private.

However, at least up to now, the U.S. Federal Reserve Board has not been willing to do this with the debts of U.S. local or state governments. Indeed, actual bankruptcies of local governments are not unheard of in the United States.

In Europe, however, the central governments within the eurozone are in a sense like state governments in the U.S., as far as their debts and the means of paying them are concerned. For this reason, the European Central Bank—at least before the current crisis—did not buy outright the bonds of the governments that make up the eurozone. Instead, it limited itself to so-called repurchase agreements, or repo operations. Instead of buying their bonds, the ECB would arrange three-month or shorter loans with the governments of say Germany, France, Italy, Greece and Ireland. The ECB also makes short-term loans to commercial banks or to the commercial banking arms of the universal banks, accepting privately issued IOUs of various types as collateral.

The central governments of the individual European nations have, however, continued to borrow at a rate more like the U.S. federal government than U.S. state and local governments that are required to balance their budgets annually. The European governments were supposed to limit their borrowing to 3 percent of their GDP, but up to now this has not been enforced.

Now, the European governments have agreed to reforms requiring that they will in the future strictly limit their budget deficits just like the states in the U.S. do. If such an agreement is really enforced with the continued absence of a real European central government, this agreement would virtually outlaw Keynesian “counter-cyclical” fiscal policies within Europe. Whatever remains of European democracy will be further eroded.

How the current crisis developed

When the most recent global economic crisis hit with full force in late 2008 following the collapse of the Lehman Brothers investment bank, the newly elected Obama administration encouraged the European countries to disregard the limitations on their borrowing that they were supposed to obey and engage in large-scale deficit spending as advocated by Keynes and his followers. This was supposed to kick-start a strong new upswing in the international capitalist industrial cycle.

The idea was that increased spending by the European central governments would make up for the reduced spending by the corporations and local governments and thus reduce the intensity and duration of the crisis. While Germany was able to limit this “stimulus” spending to what it could actually afford, this turned out not to be the case with the weaker European countries, including Greece, Spain, Portugal, Ireland and now Italy. These countries soon found themselves over their heads.

During the phase of “stimulus,” the European banks had bought many of the bonds of the European governments. If these debts prove uncollectible, these banks will be pushed into insolvency and perhaps into collapse.

And this raises a new problem: How are the governments that themselves are facing bankruptcy expected to bail out their failing banks? Instead of kicking off a new industrial upswing, as the Keynesian textbooks claimed, this time the bailouts of the banks are dragging down many of the European governments themselves.

Germany and the euro

Germany—West Germany before 1989—has enjoyed very little sovereignty since 1945. But it has not only retained but greatly developed the strong industrial economy that survived the fall of the “Third Reich.” One of the reasons why de-industrialization has not taken hold to the same degree in Germany that it has in the U.S. and Britain is, paradoxically, Germany’s weak post-World War II political position.

Remember, Britain’s own industrial decline began well before the decline of American industry set in, when Britain was dominant both politically and militarily. The American empire protects not only the monopoly corporations of the United States but the monopoly corporations of other “Western” countries—which includes Japan (10). In the final analysis, though, the U.S. state power will protect the interests of American corporations first.

For this reason, German corporations prefer to keep a larger portion of their industrial production within their own country. Ironically, if Hitler had won the war, Germany would by now probably be far along the road of “de-industrialization.”

Despite postwar Germany’s lack of political power, in the days before the euro the German Deutchse Mark—the successor to the Reichsmark—was one of the strongest currencies in the world. This reflected Germany’s strong balance of trade made possible by its industrial exports.

In the early 1920s, Germany went through a hyperinflation that caused the value of the Reichsmark to fall to virtually zero in 1923. This did much to destabilize German society both economically and politically. For example, the hyperinflation wiped out virtually all of Germany’s money capital. After the Reichsmark was stabilized in 1923, with the help of massive loans from the U.S., Germany though it remained rich in productive capital was obliged to borrow almost all its money capital from the United States at high interest rates.

When the U.S. economic boom of 1928-29 triggered a severe global credit crunch, Germany’s debt-ridden economy immediately seized up. Therefore, despite the huge export potential of its industrial economy, Germany was hit harder by the early 1930s super-crisis than any other country with the possible exception of the United States itself. For awhile, it looked as though the German working class might follow the Russian working class on the road of socialist revolution. When this didn’t happen, the road was opened instead to Hitler’s fascism, with all its unspeakable consequences.

After World War II, Germany was not saddled with reparations payments it couldn’t possibly pay like it was after World War I. Instead, the U.S. did all it could to pump money capital into West Germany and opened the U.S. home market to German exports. Resurgent German capitalism became the primary bulwark in Europe against the Soviet Union and its socialist allies including the German Democratic Republic. This, combined with the powerful expansionary phase of global capitalism that set in immediately after World War II, meant that capitalist rule in West Germany after World War II, unlike in Germany after World War I, was stable.

There seemed no chance of a workers’ revolution in West Germany due to the combined effects of U.S. occupation and the powerful economic boom that considerably raised the living standards of the West German working and middle classes. German capitalists made profits that far exceeded anything from any previous period in German history, including the Third Reich.

These high profits reconciled the German capitalists to the American empire. Therefore, though many, perhaps most, of the leaders of West Germany had been Nazis before 1945, there was little sign of a revival of the Nazi Party as such after World War II.

West Germany’s largely ex-Nazi leadership had decided that the way to make the maximum profits was to work with and not against the U.S. world empire. Today, Germany’s leaders desperately want to keep these highly profitable (for them), postwar relationships alive. They dread the possibility that they might once again have to pursue their own independent imperialist policy. After all, the last time they were obliged to do this—the Third Reich—things didn’t work out very well!

One of the foundations of (West) German political stability was the strong Deutsche Mark. But with the coming of the euro in 2002, the Deutsche Mark disappeared to be replaced by the euro. In the aftermath of the crisis of 2007-09 and now with a European recession likely in 2012, pressure is mounting for the European Central Bank, acting jointly with the U.S. Federal Reserve, to adopt still more inflationary policies as advocated by Keynesian economists to fight recession.

However, Germany’s capitalists have so far been successful in limiting the effects of recessions in Germany and staving off a serious domestic social crisis through increasing their exports whenever recession hits. They don’t see the need for risky inflationary “anti-recession” polices. The memory of the hyperinflation of the early 1920s in destabilizing Germany both politically and economically lingers on. In Germany, bourgeois economic thought tends towards “hard money” views; German economists are naturally skeptical of Keynesian economics.

The Germans are now afraid that if the European Central Bank adopts an inflationary policy under the pressure of the United States in an attempt to stave off a new global recession in 2012, Germany would be drawn into the inflationary whirlwind. In the days of the Deutsche Mark, the German central bank could insulate Germany against inflation in other European countries, and to a certain extent even in the U.S., by allowing the exchange rate of the Deutsche Mark to rise against other European currencies that were being devalued against gold.

During the inflationary crisis of the 1970s, the Deutsche Mark was repeatedly revalued against the U.S. dollar, the British pound and the French franc. Or more strictly speaking, the Deutsche Mark was devalued less against gold than the U.S. dollar, the British pound, the French franc and others. As a result, the rate of inflation during the 1970s global stagflation crisis was lower in Germany than in most of the other capitalist countries. But Germany can no longer do this, because it no longer has a currency of its own.

The Federal Reserve and the European crisis

The most immediate danger that the European crisis represents for the U.S. is that it could drag the U.S. back into recession as early as 2012. Since the Fed’s latest round of “quantitative easing” ended in June, the U.S. Federal Reserve System has allowed the global dollar monetary base—remember, most dollar bills, which largely make up this “base,” circulate outside the U.S.—to fall slightly. Now, with a new world recession threatening, the Fed’s textbook way to stave off such a recession is to engineer a new expansion of the global dollar monetary base.

To the extent a new increase in the monetary base devalues the dollar against gold, it would also allow the European Central Bank to devalue the euro—against gold—without triggering a wave of bankruptcies and bank failures in Europe. With more money around, the European governments would be able to sell bonds at lower interest rates and the U.S. federal government might even be able to launch a new stimulus program on the fiscal side.

But, as Marx pointed out, a central bank by extending loans or increasing its own note issue can ease a crisis but only as long as its own credit is not shaken.

How good is the Fed’s credit?

Compared to the European countries and the ECB, the credit of the Federal Reserve System and that of the U.S. government is relatively unshaken at this time. But the Federal Reserve System’s credit is not in all that great shape as shown by the rising dollar price of gold since the Great Recession began in 2007. For example, when the economic crisis broke out in August 2007, the dollar price of gold was around $675. Now, just four years later, it is about $1,000 higher.

If the Federal Reserve System again expands the size of the global dollar-denominated monetary base—launches qualitative easing III—the dollar price of gold could well skyrocket much like it did between August 1979 and January 1980. Back then, the dollar price of gold rose from $300 to $875 an ounce in a period of about five months. If such a run on the dollar develops again, this would be followed by a sharp fall in the price of U.S. government bonds—or what come to the same thing, a sharp rise in the rate of interest on those bonds.

Today, the U.S. government pays an interest rate of around 2 percent on 10-year bonds. But in the wake of the run on the dollar that occurred in 1979-80, the U.S. government had to pay more like 15 percent to borrow money long term! Unlike in 1980, the U.S. is today a debtor nation, not a creditor nation. Consumer indebtedness within the U.S. is vastly larger than it was in 1980. The U.S. economy has become dependent on the continuation of the current low rate of interest. This greatly limits the Federal Reserve System’s room for maneuver.

If the Federal Reserve System overdoes it in an attempt to boost the U.S. economy out of its current stagnation, a run against the U.S. dollar into gold could mean a much deeper global recession—potentially far worse even than the Great Recession of 2007-09—as early as late 2012 or 2013.

The Federal Reserve is therefore understandably reluctant to engage in a massive new expansion of the dollar monetary base in the absence of clear signs of a severe recessionary decline—not just continued stagnation—within the U.S. economy. If the European crisis does trigger a severe global and U.S. recession in 2013, the risk of a massive expansion of the global monetary base leading to a run on the dollar will in the short term be much reduced. This is because the dollar’s role as a principal means of payment on the world market under the dollar system will again come to the fore just like it did in 2008-09.

The U.S. government and the Federal Reserve, along with their Wall Street masters, are desperately hoping that the Europeans will somehow prevent a full-scale banking crisis, and therefore keep the expected European recession of 2012 mild enough that the U.S. economy will escape with nothing worse than continued economic stagnation, or at the very worst a “mild recession” that with a little help from creative statistics could be passed off as a period of “slow growth.”

If this happens, the U.S. Federal Reserve Board will be able refrain from a massive new round of “quantitative easing” and the world capitalist economy will be able to muddle through with the hope of better times after 2012—until the next downturn in the industrial cycle occurs, due around 2017 give or take a year or so. (11) Indeed, this is the very best that can be hoped for under the current system.

Europe after the dollar

The biggest danger that the members of the Federal Reserve Open Market Committee face is that if they engage in one QE too many, a stampede away from the U.S. dollar by panicky money capitalists will ensue.

Already, various new forms of credit money based directly on gold—not the U.S. dollar—are appearing. So far these “alternate” currencies play a minor role. But if the dollar plummets, capitalists around the world might start demanding payment in gold or credit money payable in gold rather than U.S. dollars.

If, for example, sweet crude oil starts being quoted in gold—or gold-based credit money—rather than dollars, the dollar system will be over. World debts would increasingly be denominated in a currency that the U.S. cannot print itself. The dollar empire—or at least the financial side of the dollar empire—will have fallen. This is why the current crisis cannot be resolved by simply having the Federal Reserve flood the world with whatever dollar liquidity it takes to do the job like many naive “progressive” Keynesian economists imagine.

What happens if the dollar system crashes?

Suppose the Federal Reserve does engage in one QE too many and the dollar system crashes over the next few years. Primary commodity prices would cease to be quoted in U.S. dollars, world debts would no longer be denominated in U.S. dollars, and as a result the dollar would no longer held be in reserves by large corporations, banks, central banks, and governments. Instead, gold itself or some sort of gold-based credit money would be held. Indeed, if this happens, the U.S. federal government might find itself forced to borrow money in a currency that it does not print itself. Then like governments in the eurozone today, the U.S. government could actually face legal bankruptcy.

From Washington’s point of view, short of a workers’ revolution in the U.S. itself, this is the worst thing that could happen. With the dollar system gone, the U.S. would be forced to bring its current account balance of payments into balance. The average standard of living in the U.S. would plummet as the U.S. would have to export more of its production to other countries while importing a smaller portion of total global industrial production. We can be sure that the U.S. 1 percent would make sure that their standard of living does not fall.

Then the U.S. government, facing a growing social crisis at home, might feel forced to actually withdraw U.S. armed forces from Europe. This would mean the end of the only central government Europe really has—NATO. Without NATO, all the old antagonisms that led to European wars that twice became world wars in the first half the last century would reemerge. The German capitalists would no longer be able to find shelter in the American-NATO empire like they have since 1945 and would once again be driven by the elemental economic forces of monopoly capitalism to once again seek to unify Europe in their own way.

The other European nations would inevitably resist, just like they did in 1914 and 1939. What would prevent this from leading to a new European war, maybe even world war?

The only force that could stop it would be the European and world working class at the head of the peoples of Europe. Here after decades of reaction, there are finally some hopeful signs.

The most hopeful of these signs is the dramatic rise of the Occupy movement that began in the very center of global reaction and the Empire, the United States itself. The resistance of the Greek workers, Spanish workers and other European workers is the other hopeful sign.

But time is getting short. If the Federal Reserve System, in a last-ditch attempt to stave off a full-scale resumption of “Great Recession” in 2012 and its transformation into Great Depression II, manages to trigger a new run on the U.S. dollar, time will be a lot shorter still.

Rather then speculate about the exact speed of events—which are by nature unknowable in advance—that are leading towards the fall of the dollar system and the American empire, the current need is to organize the working class and its allies, whether through the Occupy movement, the trade unions or other forms. Only the global working class can create a power that can replace the doomed U.S. global empire without the risk of throwing the world into a new global war. Therefore, the order of day is not to speculate about the pace of events, whether financial, economic or political, but to organize!


1 The new governments of Greece and Italy bear a more than passing resemblance to the government of Heinrich Bruning that ruled Germany between 1930 and 1932, the period leading up to Adolf Hitler coming to power. Bruning’s pre-Nazi, quasi-dictatorial government represented the end of the parliamentary system of the Weimar Republic.

Nicknamed the “the Hunger Chancellor,” Bruning pursued a viciously deflationary fiscal and monetary policy that put German finances back on a “sound basis” just in time for the Third Reich. This was somewhat like Herbert Hoover’s refusal to follow inflationary policies during the 1929-33 crisis established the “sound” financial foundations for Franklin Roosevelt’s New Deal and the U.S. war economy that followed.

2 There is nothing fixed in stone about the agreements the European leaders are making. If the people of Europe, headed by a resurgent European working class, rise up, the “historic” agreements that are being negotiated where the 1 percent are further enriched and the people make all the sacrifices can still be turned to dust.

3 The U.S. Department of Labor reported that U.S. unemployment “unexpectedly” dropped to 8.6 percent after being stuck at 9 percent for several months. The U.S. media widely hailed this, claiming that the U.S. economy is now showing definite improvement and is resisting the recessionary pressures that are coming from Europe. However, the Labor Department data actually show that only 120,000 new jobs were created, not enough to even keep up with population growth.

Therefore the Labor Department’s unemployment number, assuming it accurately reflects the growth in new jobs, is actually continuing to drift upward. The only improvement consists in the fact that if the current growth in jobs continues—a big if considering the situation in Europe combined with the reported slowdown in China—real unemployment is rising only gradually compared with the soaring rate of unemployment during the “Great Recession” proper.

Indeed, the entire drop in unemployment that has occurred since the end of the “Great Recession” has occurred because of an alleged shrinkage of the portion of the U.S. population seeking work. The U.S. Labor Department has periodically shrunk the estimated size of the working population keeping unemployment on a downward course. In fact, any reasonable interpretation of the Labor Department’s own numbers shows that the real rate of unemployment in the U.S. remains well into double-digit territory.

It should be noted that the Labor Department is not only guilty of misrepresenting the actual rate of unemployment, it is also directly serving the capitalist class by doing this. The capitalists know full well that if the rate of unemployment was honestly reported, there would be a sharp rise in demand for public works programs where the federal government directly hires unemployed workers, a demand that is now being raised by the Occupy movement. Is it a pure coincidence that immediately after the Occupy movement raised demands for public works the Obama Labor Department reported this “unexpected” and demonstratively false improvement in the unemployment rate?

The media is supposed to act as a check on governmental misrepresentation such as the U.S. Labor Department’s obviously false estimates of unemployment as though they were a fact. The reason for the complete failure of the media in this respect is not hard to find. The media is owned by and therefore represents the interests of the same capitalist class headed by the 1 percent that dominates the government.

4 This would be less of a problem if the U.S. economy falls back into recession. This would swell the deficit as tax receipts fall. But it would also cause an even larger amount of money to fall out of circulation and lie idle in the U.S. banks than is the case at present, which would allow the U.S. federal government to issue more bonds without sending the bonds of European governments into a tailspin.

5 Belgium is a tiny country. Yet despite its small size, Belgium held the African Congo in its genocidal embrace for decades. Also Belgium consist of two often hostile nationalities—the Dutch-speaking Flemish and the French-speaking Walloons. Belgium is not even a republic but a kingdom. In microcosm, Belgium thus reflects Europe as a whole.

6 The long overdue expropriation of the Prussian Junkers was finally accomplished only after World War II by the German Democratic Republic—East Germany. Austria lost its empire as a result of World War I and was briefly united with the rest of Germany under Hitler. Many top Nazis, including Hitler himself, were actually Austrian Germans. After World War II, however, Austrian “independence” was reestablished. Therefore, the full achievement of a unified Germany remains incomplete to this day.

7 Today the number of Europeans monarchies is much reduced. The monarchies of Russia, Germany, Austria and Serbia were swept away in the revolutionary wave that followed World War I. The Italian monarchy vanished in the wake of the fall of Italian fascism after World War II, as did the Albanian monarchy. The Greeks finally got rid of their monarchy in 1973 after the fall of the military dictatorship.

However, monarchies still exist in Britain and in many of the the northern European countries, including Sweden, Norway, Belgium and the Netherlands. Even tiny Luxembourg has a “Grand Duke.” As a result of the victory of Franco in the Spanish Civil War, the Spanish monarchy that was abolished in the 1930s was reestablished. The elimination of the remaining European monarchies is long overdue.

8 The Arab revolution in its current stage is what Marxists call a bourgeois-democratic revolution, or democratic revolution for short. Its historical tasks are to bring an end to the so-called state of Israel and allow the Palestinian people to return to their historical lands, get rid of all the monarchies and sheikdoms, separate religion from the state, carry out a democratic land reform, and establish a centralized United Arab Republic with a democratically elected government and constitution that would guarantee the right of the Arab working class to organize both politically and in trade unions as well as a working day of no longer then eight hours to give the workers time to participate in politics. In addition, the Arab republic would have the right to establish tariff policies to protect the home market, establish a common currency and not least ensure the nationalization of natural resources, above all oil.

This would allow Arab capitalism the most favorable conditions for development while at the same time provide the most favorable conditions for the Arab working class to struggle against capitalist exploitation.

It is inconceivable that this program can be achieved without the complete expulsion of U.S. imperialism—and other imperialisms—from the Arab lands. This is why movements like the Libyan rebels or the current Syrian rebellion that in the name of fighting against dictators—and it doesn’t matter whether Qaddafi was and Assad is a dictator—are counterrevolutionary not only in the sense of being anti-socialist but also in in the sense of being counter to the tasks of the bourgeois-democratic revolution.

Will the Arab bourgeoisie, or at least a revolutionary petty-bourgeois section of it, be able to carry out the bourgeois-democratic revolution to the end, which the European bourgeoisie proved so incapable of doing in the 19th century? Time will tell, but the current indications are not encouraging to say the least.

If the Arab bourgeoisie indeed proves unable to carry it out, the historical tasks of carrying out the bourgeois-democratic revolution will fall to the Arab working class, which will not be able to limit itself to the tasks of the bourgeois revolution but will then have to initiate the Arab socialist revolution as well.

9 This is in sharp contrast to the situation during the Great Depression, when high tariff walls within Europe combined with America’s protectionist policy prevented the Germans from easing the effects of the crisis within Germany by taking markets away from foreign capitalists. Hitler in his own way set out to prevent such a situation from arising again.

10 In the days of the Third Reich, it was often remarked that the German-aligned Japanese were “honorary Aryans.” Today, the Japanese are “honorary Westerners,” an “honor” that is still denied to the Chinese and the Indians, not to mention the smaller Asian countries.

11 If a significant U.S. and world recession does occur in 2012, this will “reset” the world capitalist industrial cycle. The next crisis would then be due around 2022, though again a premature move to “stimulate” the global capitalist economy could cause the new industrial cycle to abort. In that case, yet another world recession would occur well before 2022. But before we can speculate about that, we will have to see what actually happens over the coming year.


2 thoughts on “Europe’s Decline and Its Sovereign Debt and Currency Crisis

  1. Thank you for your series of posts over the last several years – I have found them extremely useful. You wisely avoid overt political comment. Where you do depart from your own guideline, as in note 8 to this post where you label the rebellions in the Arab world as “counter-revolutionary” – an opinion that can at best be described as controversial – I feel you risk compromising the value of your blog.

  2. German auto companies such as BMW have opened factories in the U.S. using non-union labor. German workers have very strong union representation and unions have voting rights on German company boards of directors.

    Why have German unions allowed this?

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