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Vol. 75/No. 45      December 12, 2011

Production drops, banks
wobble throughout Europe
(feature article)
Manufacturing production is contracting across the 17-nation eurozone. Between August and September, orders for manufactured products tumbled 9.2 percent in Italy, 5.3 percent in Spain, 6.2 percent in France and 4.4 percent in Germany, the region’s major industrial exporting power.

One immediate factor is the effect of austerity measures adopted by heavily indebted European governments, which have meant sharp reductions in state spending and declining purchasing power of workers hit by layoffs and other cutbacks, according to the Wall Street Journal.

The decline in manufacturing is most often presented in the bourgeois media as a consequence of the mountains of unpayable debt and contraction of credit. The reverse it true, however. The roots of what’s referred to as a debt crisis lie in the decades-long slowdown in production, employment and trade.

This process is driven by the historic tendency under capitalism for the rate of profit to decline and the cutthroat competition that flows from it. In its initial stages, the unfolding crisis of the capitalist system is manifest in the financial and banking spheres, an integral and crucial aspect of a system whose foundation is the exploitation of productive labor.

As the ruling families increasingly shift from investment in expanding production to speculative investment, where under the circumstances they find the greatest return, they blow up balloons of debt that inevitably burst with ruinous consequences.

Today banks across the eurozone, with insufficient reserves to cover their massive holdings of government debt whose value is plummeting, are less and less capable of extending credit and heading toward insolvency.

“Banks clamored for emergency funds from the European Central Bank,” the New York Times reported Nov. 22, “borrowing the most since early 2009.” This, the Times said, showed banks are “having trouble obtaining credit.”

The Economist wrote Nov. 26 that “the crisis in the euro area is turning into a panic.”

On Nov. 30, the U.S. Federal Reserve, along with the European Central Bank, the Bank of England, and the central banks of Switzerland, Japan and Canada, announced it was lowering the interest rate on loans of dollars to European banks, in an effort to push back the credit crunch.

With the looming threat of massive sovereign debt defaults and large-scale bank failures, capitalists in Europe and throughout the world are increasingly leery of investing in the region.

“The financial fates of Europe’s banks and its governments are inextricably linked,” the Financial Times wrote Nov. 14. “Because the banks are the primary source of funding for government deficits,” they get saddled with big holdings of government debt. The risk is rippling throughout the world. Already one large U.S. brokerage firm, MF Global, run by former New Jersey Gov. Jon Corzine, went belly up over a $6.3 billion pile of highly leveraged derivatives betting on European government debt.

Jeffries, the largest independent investment bank in the U.S., is fighting to avoid a similar fate due to holdings in financial instruments tied to debt in Greece, Ireland, Italy, Portugal and Spain.

Other banks in the U.S. and around the world are frantically slashing their holdings in European sovereign debt.

The situation facing the region’s weaker powers is stark. The Greek government is now paying more than 120 percent annual interest on new two-year bonds.

The spreading economic crisis pulls more and more countries into the maelstrom. To the east, Hungary had its credit rating cut to junk status and is facing harder conditions for loans from the International Monetary Fund and the European Union.

“The damaging effects of the eurozone’s ongoing debt crisis,” said Jonathan Loynes, chief European economist at Capital Economics, are shoving “the region’s economy back into a deep and protracted recession.”

The region’s capitalist rulers are torn over what to do. Some scream for inflation of the euro to ease their debt burden. Others, led by Germany, say no, demanding more centralized structures under their control to protect their capital investments from devaluation.

Either way, the eurozone is beginning to tear at the seams. And either way, workers across the continent—particularly in the weaker and most indebted nations—are being forced to bear the brunt of the crisis.
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