IBON Research Head Sonny Africa answers interview questions emailed by Philippine Collegian’s Larissa Suarez :
1) What can you say about the European financial crisis in the context of the economic recession caused by the 2008 subprime mortgage crisis in the United States?
The world economy is likely entering the second phase of the financial and economic crisis that started in 2008. The crisis erupted with private sector debt problems and corporate bankruptcies beginning in the US and then also in Europe, Japan and other advanced industrial countries. The sovereign debt troubles since last year are only the most recent manifestation of this basic crisis.
Private and public debt were used to artificially boost demand especially since the 1990s. Increasingly however the debt was not based on any intrinsic ability to pay but justified through complex financial instruments that covered up for the debt being so large as to be unpayable. The private debt bubble was the first to erupt with the high profile bankruptcies of banks and other financial institutions in the US – triggered by the sub-prime blowout – and Europe.
But even then there was also already an underlying public debt bubble that is slower to explode only because of the conventional notion that governments, unlike private corporations, don’t go bankrupt. The bail-out and stimulus packages since 2009 further inflated these sovereign debt bubbles which are starting to become more visible today starting with smaller, weaker and relatively less ‘credit-worthy’ governments such as Greece, Portugal, Spain and Italy.
2) In your opinion, would the proposed bailout of the EU member countries facing debt woes be an effective solution to the financial crisis?
The proposed bailout could prolong the seeming recovery indefinitely but will not solve the underlying problem of a severe imbalance between the overblown value of finance capital that has less and less relation to the actual and potential worth of real economies.
The US, Europe and Japan tried to forestall continued economic decline with debt-driven bailout and stimulus packages that conjured a seeming recovery. However even these temporary measures appear to be reaching their limits even if it is hard to say exactly when the next explosion will occur. Problems with debt-driven financial bubbles cannot be solved with further debt.
Indeed there is even a danger now of how the big powers are even trying to use the crisis as an excuse to increase their control of global capital. Among others there is the IMF/WB setting up a Financial Sector Assessment Program, the G7’s starting a Financial Stability Forum, the G20 convened towards coordinating financial regulation and standards, and the Basel Committee moving for a Basel III on greater regulation of capital.
3) What lessons and conclusion, especially regarding the stability of the prevailing economic order, can be drawn from the European financial crisis? What comparisons can you draw between the European financial crisis and past major economic crises in Western countries, such as the 1929 crash of Wall Street which preceded the Great Depression of the 1930s (and WWII in the 1940s)?
The on-going and still unravelling financial and economic crisis exposes how capitalism is intrinsically unstable and not viable as a long-term way of organizing economic life. Instability, inequity and poverty inevitably results with the bias for short-term financial speculation and unsustainable debt over longer-term productive investment and just distribution of the social wealth. The situation in the economy today is essentially the same as in the 1930s and the differences in some details now such as greater financial liberalization, unprecedented international financial transactions, vastly improved information technology and others are only secondary. Then as today, as Marx wrote, “the ultimate reason for all real crises always remains the poverty and restricted consumption of the masses”.