Economic growth in Europe is sluggish to say the least. Last year saw the whole of Europe in recession. GDP fell by anything between 8% (Finland) and 2% (Cyprus). Germany’s, Italy’s and the UK’s GDP all fell by 5%. Spain’s fell by almost 4% and France’s by around 3%. The figures for this year’s first quarter indicate a very weak, almost imperceptible recovery. Germany grew by 0.2%, France by 0.1%, Italy by 0.5%, Spain by 0.1%, the UK by 0.3%, while Greece continued in recession at -0.8% in the company of Ireland at -2.3%. For the euro zone as a whole the economy hardly moved at all, with 0.2% growth.

Across the Atlantic in the United States, the economy has been growing at somewhat of a faster pace at 2.7% for the first quarter, a little short of what the US Commerce Department had been expecting. This is the third quarter since the US economy had stopped contracting and that is why this low figure (which was twice revised down) is of concern to bourgeois economists. In past recoveries at this stage economic growth would have been far stronger.

In the first quarter of this year, Japanese GDP expanded 5% on an annualised basis, after a sharp fall in 2009. Growth was mainly based on exports, especially to China, and government stimulus such as subsidies for the purchase of cars and home appliances. Such stimulus is not sustainable for a long period of time considering Japan’s huge level of debt (see below).

The near stagnation in Europe and the lower than expected growth in the USA are determining factors in the present situation of the world economy. The EU is the single biggest market in the world. It produces 28% of world GDP. The United States comes second with 24% of world GDP. If we add Japan’s 8.7%, then these three major areas account for more than 60% of world GDP. All three areas have major economic problems. China has grown to the level where it is almost on a par with Japan, with its 8.4% of world GDP, and is still growing significantly. However, it is still too small to be able to turn around the situation for Europe and America.

The disparity in growth in three key areas of the world economy is leading to conflicts over what economic policy different capitalist governments should adopt. This is clear in the relations between the US and Europe, but also within the European Union itself, where a conflict is brewing between France and Germany, the latter insisting on more severe austerity measures being adopted by all the major economic powers.

Spend or cut?

This is also reflected in a debate among bourgeois economists over what economic policy should be adopted in the coming period. When it comes down to it there are two basic options that one can take from the bourgeois arsenal of economic policy. They can either adopt Keynesian methods, i.e. try and spend their way out of the crisis by getting the state to make up for the lack of demand, or they can go for the “balanced budget” methods of monetarism.

The problem with both Keynesianism and monetarism is that they only see one side of the problem. Keynesians see the need to stimulate demand, mainly via massive public spending, but also through the lowering of interest rates. Where the state spends large sums of money, according to this argument, demand rises. If the state builds roads, houses, hospitals, if it takes on large numbers of public sector workers, provides services, and so on, this puts money in people’s pockets. A building worker working on the construction of a state run hospital receives wages and spends and thus creates demand in other sectors. Lowering interest rates also is supposed to help, by making borrowing cheap. If capitalists can borrow at low rates, this makes the cost of money cheap, and thus allows the capitalist to invest, create more jobs, and more workers with wages to spend. That, at least, is the theory. In practice capitalism isn’t that simple.

The monetarist school of thought sees the other side of the equation. If you pump a large amount of money into the economy, without a corresponding growth in the production of real wealth, you push up inflation as more money chasing after the same amount of good eventually leads to inflation, as happened back in the 1970s.

Paul Krugman, a past Nobel prize winner for Economics, belongs to the Keynesian school of thought, and he is very concerned that after doing “the right thing” in 2008-09, i.e. pumping in huge amounts of state finance to prevent the recession from getting even worse and avoid the collapse of the financial system, the recent G20 summit revealed a new line of thought: severe austerity measures everywhere to cut state deficits.

This is what he wrote in a recent article in The Guardian:

“We are now, I fear, in the early stages of a third depression. It will probably look more like the [19th century] Long Depression than the much more severe [1930s] Great Depression. But the cost to the world economy and, above all, the millions of lives blighted by the absence of jobs will nonetheless be immense.

“And this third depression will be primarily a failure of policy. Around the world – most recently at the weekend’s deeply discouraging G20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”

What he fears is that just as the world economy has started to climb out of the recession it could be pushed back down by a generalised policy of public spending cuts, i.e. we would be faced with the famous double-dip recession. In fact at the recent G20 summit in Toronto the leaders of the most powerful economies on the planet agreed to cut national budget deficits while at the same time striving to promote economic growth. Already prior to the summit key G20 countries had adopted policies aimed at halving deficits within the next three years, by 2013.

Mountains of debt

Now if it were not for the huge accumulation of debt, a Keynesian policy may have worked for a brief period. But the level of debt everywhere is unprecedented. As a percentage of GDP the national debts of the following countries are: Italy 115.8%, Greece 115.1%, Belgium 96.7%, France 77.6%, Portugal 76.8%, Germany 73.2%, UK 68.1%, Spain 53.2%.

In the USA at the end of first quarter of 2010, the debt stood at 87.3% of GDP and as things stand now it is expected to rise close to 100% of GDP under Obama, a record level since the Second World War. In 2009 alone it expanded by $1.4 trillion

In Japan government debt stands at a staggering 200% of GDP. So bad is the situation in Japan that its new prime minister Naoto Kan recently warned that the country is at “risk of collapse” under this huge mountain of debt, and that what is required is a financial restructuring to avoid ending up like Greece, adding that, “Our country’s outstanding public debt is huge… our public finances have become the worst of any developed country.”

However, debt is not just a sickness that afflicts states; it also affects corporations and households. If one adds together state, corporate and household debt as percentages of GDP, the situation is far far worse. These are the figures that emerge for total debt: Japan 471%, Britain 466%, USA 296%, Germany 286%, Spain 366%, France 322%, Italy 315%. A survey by the McKinsey Global Institute reported in The Economist, points out that the average total debt for “ten mature economies” rose from 200% of GDP in 1995 to 300% in 2008. In the cases of Iceland and Ireland, two small countries that have made the headlines for the severity of the crisis they have been plunged into, total debt to GDP ratios have reached 1200% and 700% respectively.

This level of debt is what the boom of the 2000s was based on. The crisis in 1997-98 that seriously affected South East Asian economies, and also Russia, Argentina and many other economies around the world, also impacted on the USA and the EU, but did not become a generalised world crisis. There was a very mild recession in 2001, which affected the United States and some EU countries. The way the major capitalist economies pulled out of the post 1997-98 crisis was through a massive expansion of credit at all levels. So long as economies were booming and profits were up, the bonanza continued.

Now, however, the serious strategists of capital are facing a huge dilemma. They used massive credit expansion on an unprecedented level to sustain the boom of the 2000s. Without that credit expansion we would not have had the same level of growth of the markets that we saw everywhere. Now the chickens have come home to roost. As the BBC recently pointed out on Japan, “For 20 years the government has been borrowing to spend, hoping to revive the stagnant economy, amassing the biggest debt-to-GDP ratio in the industrialised world.”

Krugman appeals for more debt

And yet the Keynesians, like Krugman, are desperately appealing for more debt to be accumulated. But how much more debt can be piled on the already huge mountain? That explains why many governments are now being forced to cut public spending drastically.

There is another little problem, as The Economist of June 10th explained, “Under pressure from the bond markets, the countries at the centre of the euro-area debt crisis – Greece, Spain, Portugal and Ireland – have no choice but to make tough cuts.” The article goes on to console itself with the fact that these are mainly small economies, apart from Spain. This conveniently leaves out 1) that the debts of these countries are mainly with German and French banks and 2) larger countries like Italy could soon be targets of the “markets”.

It is all very good for the Krugmans of this world to plead with the economic policymakers that they need to act to stimulate the market, but the speculators seem to have the annoying habit of not listening. What counts for them is making a nice profit at the end of the day, and if this means pulling down whole national economies, so be it.

More importantly, the conflicting national interests of each capitalist power do not permit for a coordinated world economic policy. The French are telling the Germans not to cut spending. What that means is that the French bourgeois are asking the Germans to expand their own internal market so that French industry can export to Germany.

Obama is singing the same song. In a letter addressed to the G20 leaders he stressed the point that, “A strong and sustainable global recovery needs to be built on balanced global demand,” and he added that, “I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses…”

He wants to maintain US growth by exporting his way out of the crisis. As the European Union is one of the US’s main export markets, obviously his attention falls on the Europeans, in particular the Germans.

Obama is also pressurizing the Chinese to adopt policies – mainly to revalue the Chinese currency that would make it easier for the US to increase exports to China. As China has started to suffer a trade deficit, as it takes in more imports, logically Chinese leaders are not too keen on making it even easier for its competitors.

Danger of protectionism

Here too, we have Krugman coming to the rescue of Obama in working out what is required. In the New York Times of June 24 he wrote the following:

“Last weekend China announced a change in its currency policy, a move clearly intended to head off pressure from the United States and other countries at this weekend’s G-20 summit meeting. Unfortunately, the new policy doesn’t address the real issue, which is that China has been promoting its exports at the rest of the world’s expense.”

And adds,

“This policy [China’s supposed currency undervaluation] is very damaging at a time when much of the world economy remains deeply depressed. In normal times, you could argue that Chinese purchases of U.S. bonds, while distorting trade, were at least supplying us with cheap credit — and you could argue that it wasn’t China’s fault that we used that credit to inflate a vast, destructive housing bubble. But right now we’re awash in cheap credit; what’s lacking is sufficient demand for goods and services to generate the jobs we need. And China, by running an artificial trade surplus, is aggravating that problem.

He ends his comment thus,

“So what comes next? China’s government is clearly trying to string the rest of us along, putting off action until something — it’s hard to say what — comes up.

“That’s not acceptable. China needs to stop giving us the runaround and deliver real change. And if it refuses, it’s time to talk about trade sanctions.”

Trade sanctions have the nasty habit of provoking retaliatory measures in a downward spiral, where everyone tries to protect their own markets with the end result of suffocating the world market. Thus the Keynesian Krugman, who is desperate to stop the slide towards global economic depression, comes up with what amounts to protectionist measures, which were precisely one of the key elements in further aggravating the post-1929 crisis!

Obama, initially, like the leaders of all other major powers, stepped in with massive injections of public money to save the banks and stimulus packages to boost consumer spending. The result was a ballooning of public debt. That explains why in early June Peter Orszag, his budget director, ordered a 5% cut in spending of all government departments. The aim is to cut US$250 billion over ten years. Already many states in the US are on the verge of bankruptcy and are being forced to either freeze wages or cut jobs. So much for the stimulus package!

In Britain, the Conservative-Lib Dem coalitions is also not listening to Obama as it pushes ahead with cuts on a scale not seen since the Second World War. According to today’s Guardian, “the government is expecting between 500,000 and 600,000 jobs to go in the public sector and between 600,000 and 700,000 to disappear in the private sector by 2015.”

This will be the kind of effect we will see in all countries in the coming period. Cuts in public spending mean loss of public sector jobs, but also a knock-on effect into the private sector as contracts to private companies dry up.

Fundamental limits of the capitalist system

So, while they all move in the direction of austerity, they call on others not to cut. Everyone is asking everyone else to solve their problems for them. The reason for this is that there is no real “solution” to the crisis of capitalism within the confines of the capitalist system itself. If debt is allowed to shoot through the roof and up into the stratosphere, this will sooner or later translate into a crisis like the one that has hit Greece becoming global. If they drastically cut public spending this will depress the whole economy. Whichever policy they adopt they cannot avoid the crisis. All they will do is unload the crisis onto the shoulders of the working class in an attempt to squeeze even more surplus value out of the workers, thereby exacerbating the problem even more.

At the end of the day, the two fundamental limits of the capitalist system come to the fore, the nation state and the private ownership of the means of production. In spite of all attempts to create wider markets, such as the European Union, the division of the world economy into national – or regional – blocs is an impediment to the further development of the productive forces. We see this in the conflicts that have emerged within the G20. Each capitalist nation produces more than its own internal market can absorb and therefore needs to export its surplus. That, however, means cutting into the market of other capitalists.

And the private ownership of the means of production means that production is for profit, which forces the capitalists to find the cheapest way of producing possible, either by reducing the number of workers employed and replacing them with more advanced technology or employing workers on very low wages, or a combination of both. Thus each national capitalist class would like to squeeze its own working class, while calling on the capitalists of other countries to expand their markets. And as no national capitalist class is prepared to sacrifice its profits they all fall together.

What Obama was calling for at the G20 was an impossible task. It was like trying to square the circle. The only real solution to the present crisis is to remove the two basic contradictions. This can only be done by expropriating the capitalists and removing the profit motive and by building a world federation of socialist states that would break down the national barriers and allow for a harmonious development of the productive forces, based on the needs of the workers of the world. That is the final solution.