The crisis in the eurozone is again reaching panic levels. The world economy was “entering a dangerous phase”, IMF chief Christine Lagarde told the world’s finance ministers in Washington at the end of September.
US Treasury Secretary Timothy Geithner warned of, “cascading default, bank runs and catastrophic risk”.
The immediate concern is over the fear of a Greek default—that Greece will be unable to pay back the money it owes to the banks. That would precipitate a banking crisis in the eurozone and beyond.
As Solidarity went to press eurozone finance ministers were delaying the release of the next €8 billion transfusion needed to stave off a Greek default, because of growing fears that the Greek government would be unable to implement the savage cutbacks demanded in return for the bailout.
Many now see a Greek default as inevitable. EU leaders hope that this can be managed through a “restructuring” of the debt so that Greece agrees to pay back as little as 50 per cent of what it owes.
Larry Elliot reported in the British Guardian that EU governments believe they have just six weeks to stem the crisis by patching together yet another expansion of the bailout fund the European Financial Security Facility (EFSF).
“Officials attending this weekend’s [IMF] meetings suggested that the EFSF may have to be boosted to up to £1.7 trillion, almost five times its current size, to convince markets that it could contain the destabilising impact of a Greek default”, he claimed.
In Greece, the IMF, EU and the European Central Bank (ECB) now demand an extra €4.5 billion of cuts and taxes within the next 15 months.
After a half-hearted attempt to renegotiate, the Greek government capitulated and announced a new tax on households.
The new tax is payable with the electricity bills, so that if people don’t pay they are cut off.
Public transport in Athens came to a halt as metro workers and bus workers struck against the new attacks.
But Greece is only one aspect of a broader picture. European banks hold just €81 billion worth of Greek bonds—an amount dwarfed by the €325 billion of Italian bonds they hold.
So the extent of the panic has a lot to do with fears of an Italian default. Global financiers worry the country will soon be unable to make repayments on its €1.9 billion debt.
The credit agency, Standard and Poor’s, has downgraded Italy’s credit rating from A+ to A. This will further increase their cost of borrowing.
Silvio Berlusconi’s government in Italy is pushing through a massive package of cuts to appease the markets. It is increasing taxes while slashing wages, pensions and public spending.
This provoked a general strike and clashes outside parliament in Rome.
Outside parliament, riot police came under a barrage of fire, paint bombs and even a pig’s heart, hurled by angry protesters.
Nevertheless, prime minister Silvio Berlusconi’s centre-right government survived a key vote on his emergency budget that evening.
World leaders fear that the threat of instability in Europe will drag down global growth. The IMF has cut its forecast for growth in the US economy to 1.5 per cent for the next year. “The US economy is struggling to gain a strong foothold, with sluggish growth and a protracted job recovery”, it commented.
Obama announced plans for a new US $447 billion stimulus package in early September. But with political gridlock in Washington due to Republican control of Congress, and the US Presidential election season already approaching, his chances of getting the plan passed unamended are slim.
Tea Party supporters and deficit reduction hawks in the Republicans oppose any further government spending which would add to government debt—despite the fact that without further stimulus the economy could slump further and wipe out even more jobs.
So far China’s economy remains strong, with growth predicted to continue at above 9 per cent a year. But it is slowing as Beijing tries to rein in high inflation.
But if double-dip recessions eventuate in the advanced economies of Europe, the US and Japan this cannot fail to have an impact on China. Already “China’s manufacturers are doing it tough as tight monetary policy and faltering demand in major export markets like the US and Europe crimps activity”, according to the Financial Review.
Manufacturing has contracted for the past three months.
The IMF has revised down predictions for Australia’s economic growth for this year from 3 per cent to 1.8 per cent. This is expected to pick up to 3.3 per cent as mining output accelerates in 2012. But if China starts to falter, all bets are off.
The world economic crisis that began in 2008 is far from over. Australia managed to escape last time. But as the crisis enters a new phase, there are no guarantees this can happen again.
Based on article at Socialist Worker UK