EURO CRISIS AND THE EMERGENCE OF SUB-CAPITALISM

EURO CRISIS AND THE EMERGENCE OF SUB-CAPITALISM

After the recent events in the crisis of the Eurozone, the following remarks can be made:

The creation of European Financial Stability Facility (EFSF) to help stabilize European countries is not the answer. The creation of a special purpose vehicle (SPV) that adds more debt and the ring fencing of sovereign debt crisis of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) is a mystification of a deeper problem. The crisis is not just a crisis of the PIIGS; it is a crisis of the Western capitalism.

The debt of Italy (3rd largest economy in Europe with 20% of the GDP) is bigger than anyone can imagine. In this crisis of the euro, the central issue is structural and politic: the European monetary union cannot survive with out political and fiscal union. This is the spirit of the treaty of Rome signed on 25 March 1957 by Belgium, France, Italy, Luxembourg, the Netherlands and West Germany.

In the case of Greece, either voluntary or non- voluntary, it will default on its debt. The default will create a “credit event” in the $ 30 trillions sovereign credit default swap (CDS) market. The Greek government bond market is $480 billion and the CDS on these bonds is $3.7 billion. With 50% haircut the payout should be $1.85 billion. Financial institutions will loose the other $1,85 billion. We know that 50% haircut will not be enough to save Greece, but the European leaders should not try prevent this payout for 2 raisons: it is small and a non-payout on Greece CDS will seriously hurt the credibility of the sovereign debt market.

Recapitalization of banks is another wrong answer. European banking system is over leveraged at 26-to-1. We are not far from a Lehman Brothers scenario. This former US financial institution was over leverage 30 to 1. It will be a disaster if asset prices drop at a small 4%. In a healthy economy, banks play a strict role of intermediation. The West and the world are in this economic disaster because banks moved away from the role of intermediation; this is why the wealth of human society is at risk. The West has a problem of wealth creation, but Banks do not create wealth they take it.

The severity of this crisis combine with the environmental issues is creating a new type of risk: The existential risk; symptom of the destructive character sub-capitalism. Capitalism is a process of construction. It is based on the respect and preservation of the environment, creation and accumulation of wealth not debt. Vast accumulation and impossibility to repay the debt is a symptom of the emergence of sub-capitalism.

The world is now divided in 2 categories: surplus nations and debt nations. The BRICS symbolized the surplus nations and 2 of the members are communist states: China and Russia. China bought close to $ 2 trillions of US government securities; it did not prevent the recession in USA. There is no reason why the result should be different if China buys the European EFSF.

The euro needs help from China, but the Chinese currency (Yuan or Renminbi) is not an international currency. The IMF Special Drawing Rights (SDR) is currently composed of the US dollar, British sterling, the euro and the Japanese yen, but not the Yuan. It is certainly time to restructure the international monetary system.

Italy is a debt-nation. With 2.63 trillions Euro in debt, Italy is the world’s fourth-largest debt-nation, behind the U.S, Japan and Germany. Italy’s 10 years note yield is excessively high at 7.41% and the spread on five-year Italian credit default swaps (CDS) is close to 600 bps. It could cost $600,000 annually to insure $10 million of Italian debt for five years. $200 billion of this country $2.63 trillion debt loads will mature in 2012 with a Debt/GDP ratio expected at 120% or more. After more than 30 years of debt-fueled boom and development of consumer market, it is time to repay the debt. But, Italy will not be able to pay its debt. It is not possible to repay a debt when revenues are not generated and wealth is not created.

The euro crisis is a structural problem and a failure of political leadership. The Persistence and the inability to resolve the European debt crisis displays all the symptoms of this new form of capitalism in USA and Europe: sub-capitalism. In both continents the austerity measures are made to pay back the same banks and private investors who are at the origin of this crisis. Austerity measures will lead us to one of the key symptom of sub-capitalism: cut-and-dry-privatization (CDP). In the capitalist society, privatization is an endogenous process, element of the organic creation and development of wealth in the complex fabric of human solidarity. The role of a healthy financial industry with strong ethic is very important in this process. Cut-and-dry privatization, symptom of sub-capitalism is a legal and political decision to transfer wealth to an individual or group of people and weaken the fabric of capitalist society.

There is a paradox in the austerity measures. For example, in USA Politicians, legislators and private companies are cutting employment, health care, education, social assistance…etc., but Tax loopholes for corporations and wealthy individuals are not affected by these cuts. U.S. multinational corporations avoid about $100 billion annually in taxes. In 2008, the tax subsidies for 280 companies was $61,4 billion, $76.2 billion in 2009 and $85.1 billion in 2010. In 3 years, we have a very big number: $222.9 billion. The people of USA and Europe must repay the debt, but not the corporations. This paradox created an imbalance and disturbs the stability of the American and European societies. Politicians and legislators can cut all they want to lower government spending, but it will not solve the crisis. The real problem is not government spending, it is excessive debt accumulation, lack of wealth creation or economic growth and deindustrialization.

The West should go back to the capitalism of the industrial revolution and reform the current financial industry. The industrial capitalism of 19th and 20th century is at the origin of the economic success of the West. The current economic crisis is a failure of the new financial capitalism in this period of complex globalization. Cut-and-dry-privatization is a consequence of this failure and neutralized human solidarity and the humanism of capitalism.

Aboubacar Sissoko