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Let them eat cake

To tackle recession, nations bailed out corporates. Now, their governments are in the red. And it is the poor who will bear the brunt, writes Sitaram Yechury.

india Updated: May 25, 2010 00:45 IST
Sitaram Yechury

The Germany government's decision on May 19 to ban short-term sales of some government bonds, stocks and credit default swaps led to widespread panic in the stock markets. Every major market saw a sharp decline, with foreign institutional investors (FII) offloading shares. This happened even as there was a nagging uncertainty centered round the measures announced by the European Union (EU) to reduce fiscal deficits. While the global recession has not yet been reversed decisively, a deeper crisis seems to have set in.

The severe debt crisis of Greece has threatened the stability of the euro. This is a death knell for the flow of finance capital that is needed to shore up the markets so crucial in today's world to spur economic activity. Thus, saving Greece from insolvency, becomes important for the EU. The EU marshalled a $1-trillion lifeline for the euro region as a whole, including a $140-billion package for Greece.

So far, the world has been familiar with bailout packages for resurrecting financial giants. The reckless creation of new financial animals and their intermeshing for higher profits led to bankruptcies. The governments that bailed out these corporate houses are now caught in the vortex of mounting debt. If corporate insolvency heralded the global meltdown and recession in 2008, in 2010 it is sovereign insolvency that is threatening to snowball into a deeper crisis.

The sharp fall seen in all the major markets last week is natural in a world dominated by finance capital and neo-liberal ideology. Uncertainties over the value of currency and the consequent apprehensions of inflation frighten finance capital; hence, the outflow.

On the other hand, the financing of such sovereign debt appears beyond reach. The EU's effort to bailout Greece is led by Germany whose government debt has risen to 80 per cent of its Gross Domestic Product (GDP). What is happening in Europe is that a highly indebted borrower is offering to take over the debts of a virtually bankrupt borrower.

Sovereign insolvencies were bound to occur given the manner in which capitalism chose to recover from the current recession. The bailout packages - conservatively estimated over $10 trillion - came from the taxpayers. While they suffered, the governments also became bankrupt. The consequence is that, globally, 200 more people entered the billionaires' list. The figure now stands at 1,011 and their aggregate capital has expanded by over 50 per cent, $3.6 trillion during this crisis. India has also has its share - the number of billionaires doubled to number 52 in 2009 with their combined net worth $276 billion or a quarter of the country's GDP. All the Wall Street giants that triggered the current crisis are now reporting gigantic profits.

As is the logic of capitalism, the governments rescued the corporate giants by building up a mounting debt of their own. The US external debt as of December 31, 2009 was $13.77 trillion, almost its $14 trillion GDP. Its budget deficit of $1.4 trillion (10 per cent of its GDP) is expected to rise to 12.3 per cent by the end of the year. Its total external borrowing is projected to reach nearly $20 trillion over the next decade - assuming no new recessions, no new wars and no new financial crises happen.

The only way these governments can manage their finances and prevent insolvencies is by drastically cutting down on expenditures and significantly increasing their revenues. The former means that the livelihood standards of the majority of the working people is bound to deteriorate because there will be more cuts in the social benefit expenditures.

The financial meltdown and the global recession have imposed severe hardships on a vast majority. The austerity packages that were adopted by the Greek government before the current bailout was so painful that it led to six successful general strikes.

We, in India, will also have to brace ourselves to meet such attacks on livelihood opportunities that are bound to come soon in the name of 'fiscal discipline' and reducing deficits.

Governments routinely use deflationary policies to stabilise their currencies and potential inflation, and satisfy the confidence of the FIIs. The latter is necessary in order to prevent imminent sovereign insol-vency. This is capitalism's most familiar story. In order to retain, if not enhance profits, the degree of exploitation of the working people is intensified.

It is a Catch-22 situation for global capitalism today. In order to appease finance capital by stabilising the euro and preventing inflation, EU member countries are forced to reduce deficits and impose higher taxes. This means lower government expenditures (as higher tax revenue goes to finance deficit) depressing domestic demand and consequently depressing growth. This also means lesser resources in the hands of the governments to continue with stimulus packages. This further adds to depressing economic growth. Such economic slow down further discourages finance capital. This is the vicious cycle of capitalism and its crisis. The only salvation for the people lies in strengthening the political alternative to capitalism.

Governments tried to tackle corporate insolvency, which triggered the global recession in 2008, by announcing massive bailout packages. This lengthened the shadows of sovereign insolvency. The death of the welfare State is imminent.