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PORTSIDE  October 2011, Week 1

PORTSIDE October 2011, Week 1

Subject:

The Euro Zone Crisis - Worse than it Appears

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Date:

Thu, 6 Oct 2011 20:58:12 -0400

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The Euro Zone Crisis - Worse than it Appears

Left Margin

The Euro Zone Crisis - Worse than it Appears - Or So We're
Being Told?

By Carl Bloice
BlackCommentator.com Editorial Board

The Black Commentator
October 6, 2011

http://www.blackcommentator.com/444/444_lm_euro_zone_crisis.php

When President Obama dispatched Treasury Secretary Geithner
to Wroclaw, Poland last month to sit in at the meeting of
the 17-nation Eurozone finance ministers, it was because, as
he put it later, the way the Europeans were handling the
continent's debt crisis is "scaring the world." Geithner
dutifully told the ministers; the message and the
President's later comment were not well received.

"Obama's lecture on the Euro crisis . is overbearing,
arrogant and absurd," editorialized the German newspaper
Bild. "In a nutshell, he is claiming that Europe is to blame
for the current financial crisis, which is `scaring the
world.' Excuse me?"

"The American president seems to have forgotten a few
details," the paper said.

"The most important trigger of the financial and economic
crisis was U.S. banks and their insane real- estate
dealings, The U.S. is still piling up debt. . The American
Congress is crippled by a battle between the right and the
left. The banks are gambling just as recklessly as they did
before the crisis.

"The president's scolding is a pathetic attempt to distract
attention from his own failures. How embarrassing."

"I found it peculiar that, even though the Americans have
significantly worse fundamental data than the euro zone,
that they tell us what we should do," said Austrian Foreign
Minister Maria Fekter. "I had expected that, when he tells
us how he sees the world, that he would listen to what we
have to say."

Was Geithner overbearing in his admonition to the Europeans?
Perhaps. He is said to be that way sometimes. Was President
Obama undiplomatic in publicly rebuking the Atlantic allies
for moving to slow to confront the crisis? Could be. He has
become a lot more outspoken recently.

"In normal circumstances comity would require deference by
others to European authorities on the resolution of European
problem," Harvard University economist Lawrence Summers
wrote recently. "Now when these problems have the potential
to disrupt growth around the world all nations have an
obligation to insist that Europe find a viable way forward."

The tone of the Obama Administration's remarks on the
European economic crisis reflects what Financial Times
Martin Wolf recently referred to as "the panic."

"This is code red," New York Times columnist Thomas Friedman
wrote September 25. "We are facing a possible global
financial contagion triggered by European banks choking with
sovereign debt spreading their woes to an already weakened
U.S. financial system."

"I have never see Europe's policymakers as scared as I saw
them in Washington last week," wrote Financial Times
associate editor and European economic columnist Wolfgang
Munchau the following day. The combination of the
continent's credit crunch and the general world economic
slowdown, he wrote, "are about to throw the Eurozone back
into recession."

Then in a September 29 article titled, "How to stop a second
Great Depression," financier George Soros wrote, "Financial
markets are driving the world towards another Great
Depression with incalculable political consequences. The
authorities, particularly in Europe, have lost control of
the situation. They need to regain control and they need to
do so now."

Albeit slowly and miserly, the Europeans appeared to be
moving last week to come to grips with the crisis. The
consensus amongst knowledgeable observers appears to be that
a default on its debt is inevitable and we can expect action
to try to prevent "contagion" - that is similar collapses in
Spain, Portugal, Ireland and Italy.

Most of the current prognosis as dire, but there are those
who think it is not dire enough, that what the chief
economist for the International Monetary Fund called
"dangerous new phase" in the world economy is more perilous
than is being publicly admitted.

Prominent British economist Will Hutton, writing in the
Observer September 17, suggests that the situation is even
worse than, Geithner, Summers, and Obama describe - or are
prepared to admit. The ailing euro is part of a wider crisis
he wrote, "Our capitalist system is near meltdown."

"A 1930s-style crash threatens us and our financial
partners. Collective action is the only solution," wrote
Hutton, a governor of the London School of Economics and
visiting professor at Bristol University.

"Eighty years ago, faced with today's economic events,
nobody would have been in any doubt: we would obviously be
living through a crisis in capitalism, wrote Hutton.
"Instead, there is a collective unwillingness to call a
spade a spade. This is variously a crisis of the European
Union, a crisis of the euro, a debt crisis or a crisis of
political will. It is all those things, but they are
subplots of a much bigger story: the way capitalism has been
conceived and practiced for the last 30 years has hit the
buffers. Unless and until that is recognized, western
economies will be locked in stagnation which could even
transmute into a major economic disaster."

Hutton went on:

"Simply put, the world has trillions upon trillions of
excessive private debt financed by too many different
currencies whose risk is allegedly mitigated by even more
trillions of financial bets which in aggregate do not
minimize the systemic risk one iota. This entire financial
edifice, underwritten by tiny amounts of capital, has been
created over three decades backed by the theory that markets
do not make mistakes. Capitalism is best conceived and
practiced, runs the theory, by hunter-gatherer bankers and
entrepreneurs owing no allegiance to the state or society."

"This is nonsense. Business and the state co-generate wealth
in a system of complex mutual dependence. Markets are beset
by mood swings and uncertainty which, if not offset by
government action, lead to violent oscillations. Capitalism
without responsibility or proportionality degrades into
racketeering and exploitation. The prospect of limitless pay
is an open invitation to bad, or even criminal, behavior.
Good capitalism cannot happen without referees to blow the
whistle or robust frameworks in which markets can function;
neither is reliably created by capitalism itself, hence the
role of democratic government. Yet the world is trying to
solve the legacy of the last 30 years as if none of this
were true and, instead, that the practice and theories that
created the mess are still valid."

"US treasury secretary Tim Geithner, joining EU finance
ministers in Poland as again they pondered how best to end
the ongoing euro crisis, was at least recognizing today's
interdependencies between countries when he urged his fellow
ministers to stop bickering because the markets were
terrified by the threat of a catastrophic event - with all
the risk that posed the US."

Hutton went on to say that British Finance Minister George
Osborne "was also right to declare that a strong euro was in
Britain's interests."

"But worrying about how a failed euro might impact on
yourself is old speak," he continued. "What the markets need
to hear is that western politicians - whether in the
eurozone or not - see the euro as part of the potential
solution to capitalism's current crisis, not its cause, and
that they are prepared to do all in their power to support
the reforms necessary to make the euro survive and take
other measures vital to make the world financial system
functional again. Geithner and Osborne must put some money
where their mouths are."

"If the euro breaks up, the cascade of subsequent bank
failures and debt write-downs will be no less threatening
and Britain will be pulled into the vortex," wrote Hutton.
Noting that the EU has created a financial stabilization
facility "to try to hold the line," Hutton wrote, "But there
is no urgency in launching it; it is still not a proper fund
but, rather, a stop-gap provider of borrowing facilities and
it is too small. As bad, the German and French governments
are wedded to collective European austerity; they want to
impose long-term balanced budgets not only on themselves but
chilling austerity on the unfortunate states which have to
borrow to support their banks and bond markets."

"An entire continent is to be blighted by lack of demand in
the midst of a capitalist crisis, compounded by Britain's
scorched earth, deficit-reduction plans," wrote Hutton.
"Already, many European banks are technically insolvent,
recognized by Christine Lagarde, the IMF's new managing
director, if not by the banks themselves."

Noting the promises by major national banks in other
capitalist powers to lend money is "easing the crisis for a
while" he suggests "the outside world needs to go much
further." "Europe's stabilization facility must become a
fund with a capacity to lend and intervene to see off
speculators: Britain, the US, Switzerland and Japan, along
with China and oil-rich Arab states, need to contribute
alongside Germany."

"We are living through the most dangerous confluence of
economic circumstances in modern times," wrote Hutton.
"Trying to pretend the interdependencies do not exist or
that the collapse of the euro is the answer can only make
matters worse. It is a straight choice: we do all we can to
help each other or risk going down in what could be the
worst economic contraction for a century."

Economist Paul Krugman wrote in the New York Times September
26 that he sees "no sign at all that European policy elites
are ready to rethink their hard-money- and-austerity dogma."
The same could be seen here at home. "Mr. Geithner asked for
a more financially powerful bailout fund along with short-
term stimulus from Europe's wealthier economies," the Times
said editorially last week. "But his ability to persuade has
been undercut by House Republicans who insist on imposing
untimely austerity on the United States."

But don't just think of Democrats versus Republicans .There
is an unpartisan U.S. policy elite and it is wedded to the
same dogma. Its members are lined up against any proposal to
stimulate the economy to increase employment while pushing a
series of austere measures, including sharp cutbacks in
social programs such as Social Security, Medicare and
Medicaid. While such a prospect appears to have receded a
bit recently they have not given up by any means.

"One of the main problems today is too much debt in the
global financial system - among sovereigns, banks, and
households, and especially among the advanced economies,"
says IMF chief Lagarde, "This is denting confidence and
holding back spending, investment, and job creation. These
countries face a weak and bumpy recovery, with unacceptably
high unemployment. The eurozone debt crisis has worsened,
and financial strains are rising. Political indecision in
some quarters is making matters worse. Social tensions
bubbling beneath the surface could well add fuel to the
crisis of confidence."

Lagarde said recently that "Everyone - including markets -
realize that commitments to cut spending cannot survive a
lengthy stagnation with prolonged high unemployment and
social dissatisfaction."

[BlackCommentator.com Editorial Board member Carl Bloice is
a writer in San Francisco, a member of the National
Coordinating Committee of the Committees of Correspondence
for Democracy and Socialism and formerly worked for a
healthcare union. He is also one of the moderators of
Portside.]

___________________________________________

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on the left that will help them to interpret the world
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