This is a statement by ISA’s International Executive.
Entering a deep crisis
The coronavirus pandemic has infected hundreds of thousands and taken the lives of thousands. Most scientific and medical experts warn that the situation is bound to get far worse, with millions likely to lose their lives globally. This crisis has demonstrated both the utter ineptitude of the capitalist system to handle a health crisis of this proportion, and the heroic efforts of health workers, scientists, teachers, firefighters and many others, often volunteers, who risk their own lives, working long hours to contain and fight the virus.
They are having to do so in a situation of permanent distress, aggravated by a shortage of tests, sanitary equipment, hospital beds and staff. This is in great measure, a result of the neoliberal offensive which has been waged against public healthcare and other public services in recent decades. This has involved the gradual introduction of neo-liberal management principles including “lean production” (stripping everything down to the bare minimum), as well as outright privatisation, in former public services and national health systems.
Italy, for example, had 10.6 hospital beds per 1,000 people in 1975 compared to 2.6 today. There were 6.9 nurses and midwives per 1,000 people in 2011 compared to 5.8 in 2017. In France, hospital beds per 1,000 people went from 11.1 in 1981 to 6,5 in 2013.
As some western media commentators and politicians take comfort in the hope that the onset of summer will temper the outbreak, they often forget that their summer is winter in the southern hemisphere! The huge inequalities, poor sanitary and healthcare facilities and high population density prevailing in many parts of the neo-colonial world could result in a new cycle of human suffering on an even wider scale, should the virus take root there.
Belatedly, after a period of denial and outright cover up, governments, international institutions and politicians have ‘joined’ the struggle. In many countries hit by the virus schools, bars and restaurants are closed down. Sport and cultural activities are banned. Mass gatherings are being forbidden.
France has declared a partial lockdown. Bars and restaurants have been closed down and a demonstration by hundreds of Yellow Vest protesters, some wearing protective masks, was broken up by the police in Paris on Saturday, portrayed as irresponsible by the authorities in the context of the epidemic. However, Macron insisted that local elections would go ahead the next day.
Italy is under total lockdown, but as in almost all other countries, most companies keep operating with impunity, which makes the other measures adopted futile and illustrates the servility of governments towards the bosses. This is the context for a new wave of wildcat strikes and walkouts which has erupted internationally against the capitalist class’ reckless attempt to preserve their profit margins in complete disregard for human lives and workers’ health. Strike action has been taken by industrial workers across Italy, postal workers in Britain, bus drivers in France and Belgium, car workers in Canada, etc. Meanwhile, as the European Commission is overtaken by events, the EU’s much lauded “freedom of movement” as well as the single market, lie in tatters.
Epidemics and pandemics an increasing feature of global capitalism
Epidemics and pandemics are not exceptional, history is littered with them. It is estimated the European population was halved by the Justinian Plague (550 — 700AD). Plagues are not part of our culture, but caused by it. The Black Death spread into Europe in the mid-14th century facilitated by the growth of trade along the Silk Road before decimating 30% of the European population. Infected people had to stay inside for forty days and a bundle of straw was hung on the facade of their home, so that people could see that the residents were infected. Ships arriving in Venice from infected ports were required to sit at anchor for 40 days before landing. The Spanish flu (1918–1920) infected an estimated 500 million people around the world and resulted in 50–100 million deaths. According to the World Bank study published last year, a similar epidemic today would cause a collapse in world GDP of approximately 5%, a recession much deeper than the one in 2009 (-2%).
Since these historical examples, unprecedented road-building, deforestation, land clearance and agricultural development, as well as global travel and trade, have made humanity even more susceptible to pathogens like the coronavirus. Studies have shown that such emerging diseases have quadrupled in the last half-century, largely because of the disruption of the ecosystem by human activity. Between 2011 and 2018 the World Health Organization counted no less than 1,483 epidemics in 172 countries. In recent memory, HIV (which causes AIDS), and Ebola epidemia made headlines for killing hundreds of thousands, mostly in Sub Saharan Africa.
Because of its likeness to Covid-19, much reference is being made to the outbreak of SARS (Severe Acute Respiratory Syndrome) also in Southern China between November 2002 and July 2003 which caused 8,098 infections, resulting in 774 deaths reported in 17 countries. That epidemic, just like HIV and Ebola, though, had only a very limited impact on the world economy (-0.1%).
This time will be different
During the SARS epidemic China, representing 4% of the global economy, was not yet the economic heavyweight it is today (representing 17% of world GDP). It has largely driven the world growth since the crisis of 2008 and became an important supplier and purchaser for all continents. It absorbs 14% of the EU’s exports, compared to 6% less than 20 years ago, and provides 20% of the EU’s imports, double the figure from 20 years ago. For example, the German car industry is heavily dependent on the Chinese market: one in four BMW cars are sold there and one third of VW’s yearly profits are realized in China. China’s Asian neighbors and many global commodity producers (such as Brazil) are heavily dependent on China’s rhythm of production. Also, about 8 million Chinese tourists visit Europe every year and many more visit important tourist destinations in Asia, including Japan.
While there has been a partial reversal of globalisation and growth in world trade since 2008 the highly integrated nature of the world economy and supply chains, with production of goods and their components being fragmented in many countries and continents, means stopping production in one country translates easily into a slowing down or paralysis of production in other countries. Apple, which has a factory in Wuhan, already announced it was searching for other suppliers.
The pharma industry is heavily dependent on the Chinese chemical industry to produce an important part of generic drugs and active substances. On February 27, the American FDA (Food and Drug Administration) already reported the first drug shortage related to the outbreak, and with the disruption brought into the drug supply chain; further similar shortages are possible. China is also an important constituent part of many other sectors. This interdependence is an important transmission belt for chocks all over the world.
The world recession which is beginning is likely to forever bear the name of COVID-19. However, the truth is that the virus was the recession’s trigger, not its fundamental cause. The coronavirus appeared at a time when the world economy was already teetering on the brink. World growth in 2019 was mere 2.9%, compared to 3.4% in 2018 and 3.6% in 2017, consistently lower than before the Great Recession. A major source of concern is the lack of productivity growth. Its stagnation and decline over the past decade means that the modest growth in labour productivity is mostly driven by the accumulation of physical capital (machinery, buildings, office or warehouse supplies, vehicles, computers, etc that a company owns), rather than increased efficiency or innovation.
The world economy never really overcome the fundamental weaknesses that led to the Great Recession of 2008–2009. Productivity levels kept falling, deflated bubbles were replaced by other even bigger bubbles and even though interest rates were lowered and tons of money were printed, productive investment in the real economy never took off. Wages were kept low, house prices high and tuition fees, health costs etc, kept rising. What little benefits the “recovery” brought went overwhelmingly to the capitalist elite, deepening inequality. The vast sums of money pumped into the financial sector of key capitalist countries through measures like Quantitative Easing (QE) have overwhelmingly gone back into speculation rather than productive investment. In essence, the policy of the key capitalist countries consisted in kicking the can further down the road by pouring in more and more money.
Caught in a debt trap
In 2008–2009, the capitalists relied heavily on the “emerging” BRIC countries (Brazil, Russia, India and China), which were then as opposed to today, relatively dynamic. This was the case for China in particular, which invested in massive infrastructure projects and imported vast amounts of raw materials. Today, China is not able to play this role for a number of reasons. Apart from the effects of the coronavirus (expanded on below), increased inter-imperialist tensions and the partial stalling of its Belt and Road program, China also still carries with it the effects of its gigantic credit-fuelled recovery policy applied in response to the 2008 crisis and since.
Its total debt is estimated at more than 300% of GDP, which could be about $US40,000 billion, or about half of global GDP! Moreover, the Chinese central bank may not be fully in control of what tech giants like Tencent or Alibaba do with their money. If growth were to slow down and state-owned companies, provincial or local authorities failed to service their debts this could spiral into a multiplication of bankruptcies and contagion of the banking sector. Because of China’s peculiar state-capitalist structure this could become a great systemic crisis.
The debt is protected by administrative measures controlling the flow of capital in and out of the country. This has a massive impact on Chinese investment and policies abroad. To feed this debt and push the economy forward, China needs savings from its people and earnings from its exports. Without growth, people could put less money in the banks, and develop an even deeper mistrust of the government. For its exports, China’s investment plans abroad can guarantee captive access to a local foreign market.
Moreover, Hong Kong also plays a crucial role. It works as a conduit for financial transactions between the still not fully opened Chinese economy and the open global economy. With Hong Kong, all exchanges with the open financial world outside are relatively easy. Without it, and with significant parts of the Chinese economy still under strict administrative controls, everything would be more difficult. That brings a strategic necessity for the present economic and political situation in China. Beijing needs to keep Hong Kong under control while in economic terms keeping it also relatively free and open, to avoid being isolated.
China is far from alone in its debt crisis. A decade of record low, or negative, interest rates has piled up an all-time record amount of worldwide debt, reaching over 322% of global GDP! That means that any fragilities in the financial system have the potential to trigger a new debt crisis. Over the last decade, companies have been binge borrowing. The huge rise in US non-financial corporate debt is particularly striking. This has enabled the very large global tech companies to buy up their own shares and issue huge dividends to shareholders while piling up cash abroad to avoid taxes.. It has also enabled small and medium sized companies in the US, Europe and Japan, which have not been making any substantial profits to survive in a ‘zombie state’.
At the end of December 2019, the global stock of non-financial corporate bonds reached an all-time high of $13,500 billion, double the level of December 2008, especially in the US, where corporate debt has almost doubled since the financial crisis. Most of that debt is rated ‘BBB’, which means it would be downgraded to junk levels if the economy falters. The IMF’s latest global financial stability report underlines this point with a simulation showing that a recession half as severe as 2009 would result in countless indebted companies being incapable of servicing that debt. If sales collapse, supply chains are disrupted and profitability falls further, these heavily indebted companies could collapse. That would hit credit markets and the banks and potentially trigger a global financial collapse.
World trade a source of concern amid accelerating deglobalisation
One of the coming recession’s most pronounced features is the acceleration of the reversal of globalisation, and an increase in economic and political nationalism. This has been reflected in political phenomena around the world, with governments in the world’s key powers being taken over by a wave of right wing populism. Whereas limited but very significant international cooperation was instrumental to the capitalists being able to contain the 2008/9 Great Recession, today it is the absence of such cooperation, and instead the rise of global inter-imperialist antagonisms, which dominates and pushes the world economy towards the precipice. World trade has been an important reflection of this.
If the volume of world trade in the year 2000 is taken as 100, then it rose to 117 by 2007 but fell back to 105 in 2017. The WTO reported an increase in global trade of 1.2% last year, less than half its 2.6% forecast from April 2019. By comparison, global trade grew by an average of 6.9% every year from 1990 to 2007, spurring the growth of the global economy.
Then, on top of this, Trump started his trade war in 2018, which ended the growing interdependence of the Chinese and the US economies as the central economic relationship of world capitalism and gave way to an increasingly adversarial relationship. Even after the ‘phase one’ deal, signed by the US and China on 15 January, the average tariffs between the two countries is now 19.3% compared to 3% before the trade war began. The ‘phase one’ agreement does not represent any significant de-escalation. It is a deal between representatives of a capitalist system in turmoil and decline. Neither side is likely to draw any lasting gains and neither will workers and the poor.
The deal arose as both sides were increasingly desperate for a way to temporarily ease the conflict, with the US in an election year and the Chinese regime facing multiple internal problems.. But it is only a question of when, and over which issues, the fighting resumes.
Even as the US and China signed the agreement in the White House, US government departments were preparing new measures against Chinese telecom giant, Huawei, which has been singled out by US establishment, in particular because of its dominant role in 5G technology, the next generation of wireless networks. The US is also stepping up pressure on governments in the UK and Germany to ban Huawei from their 5G infrastructure. Further trouble is brewing in the US-China relationship over Taiwan, Hong Kong and Xinjiang, heightened military activity by both sides in the South China Sea, and the growing trend towards financial protectionism.
A pause in the US-China tariff war may also open the way for new trade conflicts pitting the Trump administration against Europe, Japan and others. In two rounds, in 2018 and again last year, Trump slapped tariffs on aluminum and steel from the EU, and $7.5 billion worth of other products following a WTO ruling in favor of the US over European subsidies to aircraft maker, Airbus. Trump is also threatening tariffs against Italy and Britain over plans to tax digital companies such as Google and Facebook. The French government caved in to Trump’s threats over a similar tax proposal.
The EU and other trading powers, while relieved the US and China appear to be stepping back from further escalation, are crying foul that the ‘phase one’ agreement amounts to “managed trade” in violation of the principles of “free trade”. This is another nail in the coffin of the WTO, which has already been paralyzed by Trump’s decision last year to block the appointment of judges for the WTO’s dispute settlements system. This arbitration system, which has been credited with holding trade conflicts in check, is now broken. Under Trump, the US government has decisively abandoned multilateralism in favor of a bilateral strategy to reach trade agreements on a state-to-state basis. As the biggest economy, this gives the US an advantage, until new crises and shocks change the balance of power, while the wider impact is a more fragmented and unstable global economy.
Coronavirus triggers economic contraction in China
The initial response of the Chinese authorities when the coronavirus first appeared in Wuhan early December last year and then when the novel Covid-19 strain was identified on January 7 was one of criminal neglect. Despite Beijing receiving reports of the situation, and even informing the WHO on December 31 of the emergence of a new type of coronavirus, the central government assented to the regional government’s cover up and did not sound the public alarm until January 20. Three days later Beijing imposed its draconian lockdown on Wuhan and Hubei province, having failed to act for more than six weeks. The Chinese regime was already in trouble beforehand. During Xi’s six-year reign its inflated official growth figures fell to 7% following 30 years of, on average, 10% growth.
Observers inside China and internationally now recognize what our chinaworker.info comrades explained earlier, that Xi’s power is much more limited than they thought. Multiple crises in US-China relations, the economy, and Hong Kong’s popular rebellion have dramatically increased the pressure on Xi and rekindled the power struggle within the ruling elite. As a result, local officials fearing anything that could damage or embarrass the Xi dictatorship were totally paralyzed in the face of the Corona crisis, and didn’t dare to move unless instructed by Beijing. News of the outbreak was suppressed. Online information was blocked. Maintaining “stability” was the top priority. Crucial time to contain the virus was lost and when it became uncontrollable, the regime’s top leadership was forced to take direct control of the crisis.
Three days later, the city of Wuhan (with 11 million inhabitants) was locked down, with all outward travel banned. In the next three days, this quarantine and travel ban was extended to a further 20 cities, affecting some 60 million people. Trains, planes, ferries and buses were suspended and stations and toll roads were blocked by armed police. Quarantined cities came to resemble wartime conditions, with the population facing severe hardship, acute shortages of medical supplies and long queues to see a doctor in an underfunded and overwhelmed hospital system.
Tens of millions of workers were left without pay as factories and offices were shut. The New Year Holiday was extended by ten days in most of the country and by even longer in some regions. Teachers went unpaid as schools were ordered to stay closed until further notice. Millions of migrant workers from inland provinces found themselves at the mercy of new quarantine rules and travel restrictions that spread across the country. Most of China ground to a halt.
Beijing then went into an acute damage limitation phase, attempting to protect the personage of “Emperor” Xi, and deflecting all blame onto the Wuhan government and police. The CCP deployed its full armoury of ‘stability maintenance’ measures with a massive propaganda and PR drive, proclaiming a “people’s war” against the epidemic. The building of two new hospitals in Wuhan at record speed, adding an additional 13,000 beds, was aimed at shoring up the regime’s authority but, in reality, far less than needs with estimates of up to 190,000 infected people in Wuhan and especially built by migrant workers with no labour contract, no health insurance neither access to medical treatment in terrible and unsafe working conditions.
The Financial Times’ Jamil Anderlini argued “if the virus cannot be contained quickly, this could turn out to be China’s Chernobyl moment, when the lies and absurdities of autocracy are laid bare for all to see.”
In terms of economic measures, Beijing announced US$12 billion in emergency funding to fight the epidemic. But in the same week it pumped US$174 billion into the banking sector and stock market to prevent a market meltdown. As well as their fear of market collapse, this also shows that the Chinese regime, just like Western capitalist powers, has a clear class allegiance to big business, and to profits over human life.
Despite the propaganda to the effect that China is “out of the woods” in terms of the Corona crisis, things are far from returning to normal. By early March, the officially reported “resumption of work rate” in China was about 60% for small and medium-sized enterprises, and significantly higher for larger companies. However, reopening a business does not mean it is operating at the same capacity as it normally would. Moreover, the reckless provocation of a new outbreak in China is a possibility inherent in the situation, as the profit-hungry regime rushes to get the economy’s wheels moving again.
Dan Wang, of The Economist Intelligence Unit, expects that 9 million people in China’s cities will lose their jobs this year as a result of the virus’ impact. According to its National Bureau of Statistics China’s industrial production tumbled 13.5% per cent in the first two months of this year and services dwindled 13% per cent. The combination suggests that China’s GDP contracted 13% and that the 1st quarter of this year will be the first quarter of negative growth since 1976. These figures are well below analysts’ expectations, with many China experts expressing surprise that government officials are even willing to report such devastating figures.
However, the actual shock could be even bigger, as the lockdowns largely only started on 23 January. Further figures seem to confirm this. During the outbreak of the virus in January and February roughly 5 million people in China are reported to have lost their jobs. Urban unemployment rate surged to 6.2% in February. These official, figures are only a rough indicator as they only consider urban employment. Most industrial workers in China are the 300 million migrants from the rural areas who work without contracts and are discriminated against. It is estimated 30–40% of them are still out of work and that this will remain so for an extended period.
Retail sales plummeted 20.5% year on year in January and February and fixed asset investment fell 24.5%, down from 5.4% growth when the data were last reported. These data released on March 16 show how severely the virus has hit growth in the world’s second-largest economy.
The power struggle inside the CCP and ruling elite will almost certainly reignite, fueled by growing divisions over Xi’s stewardship, but also ultimately reflecting new anger and radicalisation stirring in society’s base. The pandemic has exposed the regime’s failures and inflicted massive economic damage. This could unleash a new level of crisis with potentially revolutionary implications. The task of Marxists, in particular of the supporters of ISA in China, is to help the most conscious sections of the working class and youth to prepare politically for this. China’s humanitarian, economic and political crisis cries out for the building of a socialist and genuinely democratic workers’ alternative to the CCP’s authoritarian capitalism.
Stock markets flip from optimism to outright panic
Until late February, the ‘economic world’ stayed surprisingly optimistic. At that time the epidemic raged mainly in the province of Hubei, representing 4.5% of Chinese GDP. As they generally overestimated the strength of the Xi Jinping dictatorship, its capacity to mobilize seemingly endless resources and its control over the population, they probably thought the regime would be able to deal with it. Even after the lockdown of Hubei province and other measures, or maybe even because of them, they thought Covid-19 was not going to derail the world economy.
As late as 2 March, in its report “Coronavirus: the world economy at risk” the OECD wrote “on the assumption that the epidemic peaks in China in the first quarter of 2020 and outbreaks in other countries prove mild and contained, global growth could be lowered by around 0.5% this year relative to that expected in the November 2019 Economic Outlook.” And then “prospects for China have been revised markedly with growth slipping below 5% this year before recovering to over 6% in 2020.”
By then, the epicenter of what was belatedly recognized as a pandemic had already shifted to Europe. In the last week of February, this led to European stock markets losing between 12 and 15% on average and various US stock markets posting their sharpest falls since 2008. On 28 February, stock markets worldwide reported their largest single week declines since the 2008 financial crisis. It led to the finance ministers and central bank executives from the G7 countries releasing a joint statement in order to calm down the markets, pledging that they would use all appropriate tools to address the socioeconomic impact of the outbreak.
In the following days a number of Central Banks from Malaysia, Australia, Indonesia and Mexico and others either cut their rates or took other stimulus measures, but the main surprise came from the US FED. It lowered its rate by 50 points. In response, contrary to European and Asia Pacific markets which had mostly briefly risen, US markets all fell and the yield on 10 year and 30 year US treasury securities fell to record lows.
Oil price crisis enters the mix
It is said that an accident never comes alone. Reduction in travel and lower demand for oil in China as a result of the coronavirus lockout caused a drop in the price of oil. It led oil producers’ cartel, OPEC, to discuss a potential cut in production to counter this. Plans were made to cut oil production by 1.5 million barrels per day to the lowest production level since the Iraq war. At a meeting in Vienna on 5 March 2020 however, OPEC and Russia failed to reach agreement.
Engaged in a fierce economic war for reduced market outlets both Saudi Arabia and Russia then announced competing increases in oil production on 7 March which made prices fall by a further 25% percent. On 8 March, Saudi Arabia unexpectedly announced that it would further increase production of crude oil and sell it at a discount (of $6–8 a barrel) to customers in Asia, the US, and Europe. Extraction of crude oil in Saudi Arabia is much cheaper ($18 a barrel) than in Russia ($42), let alone shale oil production in the US. If Saudi Arabia continues to flood the market it could push many Russian, American and other oil extractors out of business.
The Russian–Saudi Arabian oil price war, combined with growing Coronavirus panic, triggered what became known as “Black” or “Crash” Monday. This saw the biggest drop ever of the Dow Jones in a single day and many other stock markets breaking all kinds of “bear” (i.e., when stock prices fall by at least 20% following a previous high) records around the world. It was followed by yet another avalanche of announcements of Central Bank and government interventions.
In the US, Trump proposed a fiscal stimulus in the form of cutting the payroll tax, that collected $885 billion in 2018, to nothing. Then, on 11 March, he announced a temporary 30-day travel ban against the 26-member Schengen Area in Europe. The following day became “Black Thursday”, with an even bigger single day percentage fall of US stock markets and another day of international market havoc. The Dow Jones registered its fastest move to a bear market in its 124-year history. Between February 17 and March 13, Wall Street’s S&P 500 lost 27% of its value, London’s FTSE 100 lost 30% and Frankfurt’s Dax 33%.
Heading into a deep recession
Stock markets are far from a correct reflection from the exact state of the economy. They do, however, indicate in a distorted way the direction the economy is heading in. From late February onwards, economists and commentators started to openly raise the possibility of recession. Their main question, however, was what form it would take and how deep it would be? Would it be a V-shaped recession, beginning with a steep fall as a result of restrictions introduced during the virus’ peak, soon to bottom out and make way for a strengthened turnaround?
Or would initial indications of recovery be premature and lead to a second dip, a W-shaped recession? Usually when raising this, economists called on the authorities to provide help, especially for small and medium size companies, in the form of tax rebates, cheap borrowing, or financial help to staff being pulled out of work. Otherwise these companies might go bust or start to lay off workers, which would undermine the possibility of recovery, leading to a longer U-shaped recession or even to an L-shaped recession with no possibility of recovery in the short to medium term.
The possibilities to avoid such a scenario are diminishing by the day. On 13, March 13 JP Morgan announced that its views of the coronavirus outbreak had “evolved dramatically in recent weeks.” The sudden halt to economic activity through quarantines, event cancellations, and social distancing alongside weeks of financial-market chaos made it conclude that the US and the European economies will be hit by deep recession by July.
It that estimates US GDP will shrink by 2% in the first quarter and 3% in the second while the Eurozone contracts by 1.8% and 3.3% respectively. That would be disastrous. During the Great Recession of 2008–2009 the decline in output in the US was around 4.5%. It is now estimated to be around 6.5% for China and Italy to start with and might go up to 10%. At the peak of the great recession the US economy was shedding jobs at a rate of 800,000 a month, and the unemployment rate peaked at 10%. This time it will be much worse. Already in China millions have been pushed out of work and many more will follow worldwide. The ruling classes are terrified of the anger this could provoke which could revive and expand the revolts and class struggles witnessed in the latter part of 2019 which touched every continent.
A range of other institutions including Goldman Sachs, and economists are also reviewing their estimates, and none look much more optimistic. Kenneth Rogoff, of Harvard University said “a global recession seems baked in a cake at this point with odds over 90%.” Olivier Blanchard, Peterson Institute, said there was “no question in my mind that global economic growth will be negative” for the first six months of 2020. The second half would depend on when peak infection was reached, he said, adding that his “own guess” was that this period would probably be negative as well.
The IMF defines a global recession as being when growth, normally about 3.5 to 4% a year, falls below 2.5%. Not all IMF alumni believe this definition is sensible in the current circumstances but all have said that the conditions for a global recession are being met regardless of the precise definition. In 2009, world GDP went down by 0.1%. At the moment the OECD’s scenario in case of the pandemic spreading outside China is of 1.5% growth, however this will soon have to be revised downwards, possibly way below the level of 2009.
Gita Gopinath, the IMF’s chief economist, said that although it was hard to predict, this did not look like a normal recession. She pointed to data from China showing a much steeper drop in services than a normal downturn would predict. She also said: “This should be a transitory shock, if there is an aggressive policy response that can stop it morphing into a major financial crisis.” In many respects, she then actually got that aggressive policy she was asking for…
On 3 March, the FED applied a 0.5% interest rate cut in light of “evolving risks to economic activity” from the coronavirus. Then on 12 March, it announced plans to expand quantitative easing by $1.5 trillion to inject money into the banking system. Then, on 15 March, the Fed cut again its interest rate by a full percentage point, to a target range of 0 to 0.25% accompanied by another $700 billion in quantitative easing. On 16 March however, stock markets plunged again, the Dow Jones by nearly 3,000 points, or over 12%, its largest intraday point loss in history. The FED’s bazooka was aimed at cushioning a lingering financial crash, but from the point of view of easing the markets, it had the opposite effect and worsened the crisis.
What should have been done, but to a much larger extent than capitalists are prepared to, is touched upon by Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance: “if credible and specific fiscal and public health policies are put in place to contain the economic and public health risks that is when you will begin to see a bottom in the stock market.” That was confirmed when the heavily criticized Trump administration finally announced a number of limited measures improving access to testing. And again when Trump declared the coronavirus pandemic to be a national public health emergency and released $50bn in government spending directed towards pandemic countermeasures, or when Nancy Pelosi stated that the US House of Representatives would pass a subsequent bill, including expansion of sick leave, which Trump reversed his initial opposition to, and endorsed. These actions were behind the brief moments when stock markets interrupted their downward spiral.
This is not because the markets or the establishment suddenly feel compassion for working class families. Some of the more cynical ones even see opportunities in the coronavirus pandemic, such as the ‘short-selling’ speculators who have raked in profits by making bets on falling share prices on the stock market. Others calculate that when lots of old, unproductive people die, it will boost productivity because the young and productive will survive in greater numbers.
It is partly because the virus also threatens their own health and wealth, but mainly because they are terrified of the social convulsions it might provoke if they are seen as too insensitive and greedy. Even the OECD now argues for additional fiscal support for health services including sufficient resources to ensure adequate staffing and testing facilities. It also proposes temporary assistance, such as cash transfers or unemployment insurance, for workers placed on unpaid leave, and by guaranteeing to cover virus-related health costs for all, retrospectively if needed. For the same reasons, some banks allow people to postpone mortgages and even right wing governments are taking special measures such as granting special sick leave, or allowing “technical unemployment” with partial compensation for lost wages.
Representatives of the ruling classes argue that we are in a “warlike” situation and that this requires exceptional measures, increasingly restricting our liberties. They introduce the type of economic measures they would have promptly rejected only weeks ago and even consider the weapon of nationalisation, as even the right-wing French prime minister announced and which has since become a recurrent theme. Strikingly, he made this proposal not only to save companies from going bust, but also as a threat to those not respecting the sanitary rules.
Of course, the ruling classes combine any measures with an appeal for national unity, which unfortunately many trade union leaders and leaders, including those on the left have swallowed all too easily. While the idea that this is an external enemy, a hostile “invasion” that we all have to stop via national unity will have an impact on broad layers in society, already a growing number of workers and youth see through the hypocrisy. This has especially been the case among industrial workers who would accept social self-isolation as necessary and responsible, but wonder why they have to keep working and without adequate protection.
This “warlike” situation will be a turning point. The ruling classes will attempt to seize from this crisis any possibility to remove democratic rights. Workers and poor on the other hand will have learned, through some of the measures being implemented, that neoliberal economic concepts can be overruled.
While socialists welcome all measures which limit the power of the profiteers and strengthen public services and living standards, we explain that on the basis of a profit-driven capitalist system, any such measures will be insufficient to match the gravity of the situation. Only by replacing the profit system with democratic socialist planning and democratic public ownership as the motor of a transformed economy, can the world’s resources be effectively mobilised to meet the needs of humanity. While capitalist governments may turn to “socialism for the rich” — policies which in effect loot the public sector to protect a minority’s profits — they are incapable of the scale of public investment, coordination and planning which the situation demands.
Europe in the eye of the storm
The European Commission also revised its growth figures from 1.4% for 2020 in February to -1% by the second week of March and then between -2 and -2,5% halfway through March, The Italian economy has been in lockdown for weeks and its industrial heartland for even longer. That is after years of very sluggish growth, with Italy still far behind its pre-2008 level. Italy already had the world’s third largest sovereign debt in relative terms (135% of GDP), tightly interwoven with its toxic banking system. Its banking stocks value has been halved since mid-February. A credit crunch seems almost certain and the specter of a sovereign-bank “doom loop” threatens. A “doom loop” is the dilemma regulators face in allowing domestic banks to be liquidated when these banks are also the largest buyers of their country’s debt. With no institutions left to buy a country’s debt, the sovereign goes into default along with its banks.
Italy’s economy is big enough to trigger a world crisis if mismanaged. According to Ashoka Mody, the IMF’s former deputy director in Europe, an urgent firewall to the tune of between €500 billion and €700 billion is needed to avoid the risk of a financial chain-reaction through the international system. While the ECB, the European Commission and EU member states seem to realize the depth of the coming crisis, there is still a long way to go before they will be prepared and agree to finance that type of intervention. The IMF on the other hand simply lacks the necessary resources for such a massive operation.
In the context of the aforementioned global tendency towards political and economic nationalism, which has swept through Europe in recent years, the political obstacles to 2010-style “bailouts” being made available to struggling peripheral member states should not be overestimated.
European countries, especially in the Eurozone, have seen weak growth for some years, sharply deteriorating since last year. Its locomotive, the German economy, slowed down to 0.6% growth last year. Its manufacturing sector has been in recession since the second half of 2018. It is strongly exposed to the slowdown in global trade. In 2019, German industry shrank by 5.3%, with car-manufacturing down 25%. While Germany is on the low end of Eurozone growth, the whole area’s growth figure for 2019 was a mere 1.2% and was already set to go down to 0.8% before the pandemic arrived.
It will now be much worse. On top of that, a no-deal Brexit by the end of the year could still occur. While that is far from the main worry at the moment, it would have a considerable negative impact on growth and lead to further volatility. At the moment however, the coronavirus pandemic is at the centre of attention. Each member state is taking its own initiatives, borders are resurrected, freedom of movement is being restricted and the single market put under great pressure. Country after country is declaring its own version of lockdowns and lockouts.
The ECB cannot but recognize its impotence. Faced with the economic effects of Covid-19 it admits that it is nation states and the European budgetary authorities that are holding the keys to the situation. The ECB’s interest rate has already been at zero for four years. The rate at which commercial banks can deposit money in the ECB is already negative (-0.5%). To reduce it further would only have a marginal impact. The ECB and the national central banks can only flood commercial banks with sufficient liquidity in order to avoid a reduction of credit to companies and households. In order to do so the ECB will increase its long term loans to commercial banks, at a 0.75% negative rate. In other words commercial banks will be subsidized. The ECB will also extend quantitative easing by €120 billion.
This will not be sufficient to reassure investors and neither will commercial banks, even when subsidized by negative interest rates, be ready to lend money to companies which are so weakened by the collapse of their sales. The ECB therefore appeals to nation states to offer public guarantees to private companies when borrowing. It appeals to nation states for ambitious and coordinated budgetary action. Researchers from the Bruegel institute sketched the main measures which should be activated: important supplementary means for national health systems; various measures to support households, liberal professions, companies and local communities; and macro-economic measures to the tune of 2.5% of GDP to be financed by increased budget deficits. Pierre Wunch, governor of the Belgian national bank, explained: “Today we are confronted with a major shock, which should be temporary, we must use all possible margins through selective and temporary measures in order to limit as much as possible companies going bust and jobs being lost. We should do it frankly and without hesitation.”
European Economy Commissioner, Gentiloni, stressed that the Commission’s stimulus offers member states the possibility to utilize hundreds of billion Euros to fight the Coronavirus. That will be more than necessary. European budget rules will be loosened, including the sacrosanct Maastricht norms, and all exceptions to the stability pact will be fully applied. This, according to Gentiloni is required to give the financial market the confidence that, this time, EU countries will do everything to avoid a deep recession. German Minister of Finance, Scholz, promised unlimited support to German companies, which apparently could reach €500 billion. France, Sweden, Spain, Denmark and other European countries also announced considerable stimuli.
Italy announced an extra €25 billion in budget spending to suspend debt payments for companies and help them pay workers temporarily laid off due to the lockdown. The EU commission also released a further 37 billion euro from its budget to help companies and gave 1 billion euro to assist the European Investment Bank. Rules for public support to companies are being softened as well as the possibility to temporarily lower VAT and postpone the collection of taxes. The Spanish government has even decided to requisition facilities from private healthcare providers to tackle the pandemic. Like in every major crisis, after having glorified the so-called merits of the free market, capitalism needs to be rescued by the state to bandage its wounds and prevent further collapse.
For many it will be clear that these limited “wartime” concessions by the ECB and the European Commission do not make them any less anti-worker or anti-poor. If anything, popular hostility towards them keeps growing. The Italian population was scandalised over the original refusal by the French and the German authorities to let crucial sanitary and medical aid for Italy past their borders. This has been exploited by the Chinese regime which promised additional aid and medical advisers to Italy (which was already being used by China as a foothold in the Eurozone through its participation in the Belt and Road initiative).
The European Union, a neoliberal, anti-worker project presented under a “progressive” veneer of free travel and Europeanism, has been tested again and again. However, this developing deep recession which will provoke an avalanche of companies going bust, will drive millions into unemployment and economic hardship, will undermine living standards thus suppressing demand and making recovery more difficult, will prove its ultimate test. . The EU has never proved capable of decisively overcoming the continent’s national contradictions, and the global economic and geopolitical context strengthens the already strong centrifugal tendencies within it. The EU is very unlikely to survive this test in its actual form.
The scene is set for major class battles
A deep recession, possibly even a depression, might for a while have a paralyzing effect on the class struggle as workers and their families assume a “defensive” position, gripped by fear of losing what little they have. Moreover, it is not inevitable that the mass of the population will immediately understand the connection between capitalism’s crimes and the spread of the Coronavirus. The ruling class will present the coming catastrophe as an “act of god”, some natural disaster that nobody could have avoided or predicted and which we all have to swallow, along with the necessary “sacrifices”.
They will also stoke the flames of nationalist and xenophobic reaction, blaming problems on a “foreign” virus, and projecting this onto migrants, refugees etc. This can gain an echo among a section of the population, for a period.
Ultimately however, this will not be the dominant response of workers, women, young people and the oppressed around the world. Even in the short term, mass unemployment and attacks on living standards will fuel mass anger. Combined with the ruling class’ criminal mismanagement of the Coronavirus, and its pursuit of profit at the expense of workers’ health and wellbeing, this will produce social explosions in the age of Covid-19.
This generation is different. While it lacks the mass organisations and political experience and outlook of previous generations, it is a generation incubated by extreme living and working conditions, with no security at all. For some time already, it has hated the establishment and the system’s inequality.
This generation, or at least part of it, went through the experience of the Great Recession, and lived through a continuous policy of liberalisation, cuts and privatisation, the failure of which has been dramatically exposed. It is also a generation with experience of struggle, most recently in the magnificent and ongoing global climate revolt, characterised by an incipient understanding that the system is incompatible with the needs of the planet and a widespread openness to revolutionary ideas. A new global economic crisis will provide a further school in the bankruptcy of the capitalist system and sow the seeds of revolutionary socialist conclusions to be drawn by millions.
The experience of this crisis will also not be lost on the working class. For example, it is very unlikely that health workers will accept to simply go back to normal once the curve of the pandemic has turned. On top of that, when moving into struggle these and all essential workers will enjoy enormous popular support. While social isolation has been accepted by many as a responsible attitude during the pandemic, it also created an undeniable sense of solidarity, especially with those who have fallen prey to sickness and hardship, or are most at risk. . This solidarity can become a weapon of working class resistance over the coming period — also characterised by a mighty battle over who will pay the bill for this crisis: the working class again?
This crisis has been a crucial turning point in many aspects. We will pass through different stages as the crisis evolves, but in general the situation will be very open. Demands previously considered to be more difficult will be accepted as realistic and achievable, such as a general reduction of working hours without loss of pay, the organisation of workplace and community democracy. A socialist program, based on the nationalisation and democratic planning of key sectors of the economy will find a much greater echo than in the past. The Coronavirus crisis, just as with the climate crisis, vividly shows the burning need for international socialist planning, on the basis of a new regime of global partnership and cooperation, which is impossible in the greed-driven capitalist system.
However, as in every other crisis in capitalist history, the system will find ways to preserve itself, over the bones of the working class and poor, if an alternative is not built. The building of an international revolutionary socialist force, which grows and develops as part of the struggles to come, which intervenes energetically, defending a united struggle for the socialist transformation of society on an international scale, is paramount, if the global working class is to avoid paying the price of yet another crisis.
