The Greek government has the highest debt to gross domestic product ratio in Europe, 165 percent. At a eurozone summit October 27, European government representatives hammered out a plan to write down half the Greek debt owed to private banks. The deal was pushed above all by Berlin and Paris, the two most powerful nations that use the euro as a common currency and whose banks own the most Greek debt outside of those in Greece itself.
After the deal, the trading price of Greek debt plunged further and the yield on Greek debtthe rate of return for bondholders and therefore the price for Greece to acquire new loansrose substantially. If everyone has agreed that Greek debt will only be written down by 50%, John Hussman asked in his November 7 Funds report, why is the 1-year note trading at just 38% of face value, with longer maturities trading below 30% of face?
The European Central Bank, International Monetary Fund, and the European Commissionthe so-called troikahave been continuously pressing the Greek government to implement one after another round of spending cuts and higher taxes in exchange for further loans to prevent default on debt. On October 19 and 20 massive demonstrations and strikes by the countrys workers protested plans for a new, third round of austerity. Greek parliament nevertheless approved the measures October 20, which included higher sales taxes, job cuts and slashes in social services.
Days after the 50 percent write-down deal was announced, Greek Prime Minister George Papandreou called for a national referendum to put the agreement to a vote.
The announcement was met with shock and outrage from the propertied rulers and their governments across the continent. German and French officials summoned Papandreou to crisis talks November 1. Europes leaders, making it plain that theyve reached the end of their patience with Greece, the November 3 Wall Street Journal reported, demanded that the beleaguered nation declare whether it wants to stay in the euro currency unionor risk going it alone in a dramatic secession.
Impending loans to Greece were suspended and pressure brought to bear. The treaty doesnt foresee an exit from the eurozone without exiting the EU, said European Commission spokeswoman Karolina Kottova. Seventeen of the 27 members of the EU comprise the eurozone.
Under heavy pressure from all sides, Papandreou dismissed the top military brass and replaced them with officers chosen by his defense minister. This put nerves further on edge in a country that was ruled in the 1960s and 70s by a military dictatorship.
Papandreou soon backed off, announcing he would no longer seek a referendum, but would enter negotiations to replace his administration with a national unity regime, to be run by a neutral technocrat. Negotiations over the new government have stalled in bitter infighting. The argument was not over who could claim the cabinet positions, but who could avoid taking them, particularly the finance ministry, wrote the New York Times.
While this move temporarily eased concern about an impending bankruptcy of the Greek government, it has had no effect on the spreading crisis across the continent.
Debt crisis in Italy
Attention is now focused on Italy, whose total debt stands at 120 percent of GDP, the second highest in Europe. Yields on 10-year government bonds rose to the highest levels since the adoption of the single euro currency 10 years ago, reported the Times, reflecting falling investor confidence in the Italian economy.
Italy is the third largest economy in the eurozone, behind only Germany and France, and the eighth largest economy worldwide.
Italy has nearly 2 trillion euros [$2.6 trillion] in outstanding debt, reported Stratfor. An Italian credit cutoff would trigger a financial meltdown across Europe that would both be immediate and catastrophic.
On November 8 Prime Minister Silvio Berlusconi announced that he would resign, after a parliamentary vote showed he no longer commanded a ruling majority. However, he made the offer conditional on parliament adopting a new, deep austerity package.
This roiling crisis highlights the internal contradictions tearing apart the European Union. Ostensibly set up to give the continents differing capitalist countries a mutually beneficial combination of free trade internally and protectionism against the United States and Japan, the arrangement was to the greatest advantage of the strongest states, especially Germany.
Initially the eurozone pact provided cheap credit to the weaker capitalist regimes, which enabled them to expand. However, it did so by driving up their debt, which is now increasingly unpayable. As part of the eurozone, they dont have the option of devaluing their currency, as capitalist governments often do under these circumstances to reduce their debt burden with its own ruinous consequences for working people. Instead they are forced to implement immediate and harsh austerity, cuts in spending, and heavy taxes, which in turn serve to accelerate the contraction of production and trade.
Some Greek politicians are rebelling against the stranglehold of the EU and Germany, urging the country to declare bankruptcy and reinstate the Greek national currency, the drachma.
The developments are rooted in the worldwide drop in capitalist production. For decades the propertied rulers have faced declining profitability, based on the downward curve of capital development and sharpening competition for markets, low-cost labor and raw materials.
As a result investment in expanding plants and production receded as capitalists increasingly put their money in complicated forms of speculative debt, especially leveraged trade in derivatives.
In Germany the crisis is starting to grind down its export-driven economy. The government announced November 7 that new manufacturing orders fell 4.3 percent in September, the biggest drop in more than two years, with orders from within the euro zone falling sharply.
These are the beginning stages in the unraveling of the European Union. Deepening contradictions drive the individual capitalist states to turn increasingly toward national sovereigntytheir own currency, their borders and their armyto shore up their class rule.
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