Published in An Phoblacht on May 20, 2010
THE British Tory/Liberal Democrat coalition has announced that it will immediately make £6 billion in public spending cuts this year in order to begin reducing the state’s £163bn deficit. The coalition will reveal an emergency budget on June 22nd, with further cuts to be implemented this autumn.
The announcement comes as no great surprise – it was a Tory election pledge, while the Lib Dems and Labour both campaigned against such immediate cuts, saying the move would threaten Britain’s fragile economic recovery and threaten to push it back into recession.
While the North’s Executive will not be affected by this round of cuts this year, it will be expected to “pay back its share” of these spending cuts as well as make further spending cuts next year. Sinn Féin has called for a united front of all parties to formulate a plan of action in the Executive to effectively resist major cuts to the block grant or the North’s public services.
Among the initial measures in Britain will be a freeze on recruitment to certain vacant public sector jobs and the sacking of agency and temporary workers. With unemployment in the state now at 2.5 million people, trade unions are preparing for a campaign of industrial action to halt the new government’s plans to cut jobs and pensions and further privatise public services.
Sovereign debt crisis
‘Reducing the state deficit’ has become the mantra of governments across Europe as the global financial crisis, which hit world markets in 2008, has entered its second phase – the ‘sovereign debt crisis’.
The United States, Britain and the Eurozone countries have collectively given the banks more than $14 trillion since September 2008. But the massive state intervention into markets has been aimed at nursing the banks and financial institutions back to the condition where they could carry on as they had before the collapse, rather than taking them into permanent public ownership.
Now, the political sponsors of the financial elite argue, begins the age of austerity – when the public deficit caused by the bail-out is to be reduced by cuts to public spending.
In response to several downgrades in Greece’s credit rating since December last year, European Union members and the International Monetary Fund initiated plans for a ‘financial safety net’ in March aimed at guaranteeing loans for member states under threat of defaulting.
On May 10th, the EU agreed the terms of the ‘safety net’, its biggest bail-out package since 2008, which consists of about €750 billion. There is €440 billion in guarantees from Eurozone states, €60 billion in a European debt instrument, and €250 billion from the IMF. Of course, any vulnerable state that needs to avail of this assistance will have to agree to harsh spending cuts and other conditions.
The Dublin Government has been voluntarily implementing brutal ‘austerity’ cuts in public spending since 2008 to reduce the state deficit. Other states with high levels of public deficit (5-10% of GDP) – Portugal, Spain and Italy – have begun implementing similar cuts this year.
After Standard & Poor downgraded Portugal’s credit rating last week, the Portuguese Government said it would rush through spending cuts planned for next year. Spain’s rating was also downgraded last week by S&P and the government announced further spending cuts of €15 billion in 2010-11.
On May 9th, German Chancellor Angela Merkel’s centre-right coalition lost an important state election in North-Rhine Westphalia, and its majority in the upper house, after committing to making the largest national contribution to the Eurozone ‘safety net’ package.
Greece – which has a fiscal deficit of about 10% of its GDP, similar to the US’s and less than Britain’s – was forced to accept a “rescue package” of €110 billion this month after its credit rating was downgraded to junk status by the same agencies that played a major role in causing the global financial meltdown in 2008.
The package of loans and guarantees came with conditions of major public spending cuts, including cuts to public service jobs and pensions, raising the retirement age, privatisations and more – provoking outrage among the Greek population and a general strike that shut down the country on May 5th.
Economist Michael Burke pointed out in ‘An Phoblacht’ last week that the bail-out is not aimed at reviving the Greek economy. “The targeted beneficiaries of the bail-out are the holders of Greek Government debt. These are mainly German, French, British and US banks,” he wrote.
Several things are clear from the latest crisis in Europe, which has arisen as a result of the response to the 2008 crisis.
The states with the highest debt-to-GDP ratio are those that have implemented cuts rather than stimulus measures to deal with the recession.
The Greek/Eurozone crisis, like the global financial crisis, is largely the result of shady financial speculative practices that were not reined in and regulated after the 2008 collapse.
EU leaders charge Greece with masking its true debt level since entering the Eurozone in 2001. Goldman Sachs helped the Greek Government do so by turning its public debt into tradable ‘derivatives’. Goldman Sachs and other financial institutions were then able to gamble on Greece defaulting. This speculation fuelled the “loss of market confidence” that saw the state’s credit rating downgraded to being a risk for investors.
France, Germany and Italy have also turned their public debt in tradable derivatives.
The financial crisis has not passed but has entered a new phase of public debt and the nationalised debt is being repaid by states’ cuts to public spending. Political, economic and social policy decisions have been totally subordinated to the market.
It is also clear that Eurozone leaders are trying to ensure that the weaker states in the zone are forced the bear the brunt of the most severe public spending cuts. The strongest members are embarking on a drive to reduce member states’ independence in fiscal policy matters.
If the austerity measures are successfully implemented in Greece, workers in Ireland, Portugal, Spain – and then the rest of the Eurozone states – will be next.