With so called “technocrats” being installed in Italy and Greece to lead governments through austerity programs, the discussion of who benefits from these programs and who pays remains largely in the background. When benefits are discussed they are usually couched in terms of systemic benefits under the guise that if the “system” benefits then everyone benefits. But the austerity programs being implemented straightforwardly benefit the large banks to the detriment of the citizens of these countries.
The banks see two benefits from austerity policies: the use of state power to enforce their claims that debts be repaid and they see asset prices driven down. The first goal is intuitive enough and it well explains why even in the U.S. government policies have been designed to facilitate debt repayment rather than to dismiss debts outright. No matter how malodorous the terms under which bankers lent the money, as long as borrowers can be forced to repay it, the banks benefit. And with sovereign debt, the “borrowers” being forced to repay the debt tend to be ordinary citizens who had little to do with incurring it and who just as likely saw no benefit from it.
The second benefit to bankers is less intuitive but more insidious. After all, why would banks want to see the value of the assets that are the collateral for the loans that they’ve made fall? The reason why is that the assets that the banks own are the loans that they’ve made and not the underlying collateral. As long as borrowers are forced to repay these loans the payments that the banks receive become worth more as collateral values fall because the money received will then buy more. Expand this idea to state assets in Greece and Italy and the banks can own water systems and roads from which they can extract fat incomes in perpetuity.
Why would core EU political leaders (and leaders in the U.S.) perceive it to be in their interest to be shills for the large banks by implementing austerity policies? Simply put, if the banks can’t enforce debt repayment they will either require bailouts in excess of what is politically feasible or the global banking system will re-enter the systemic crisis from 2008 that was never adequately resolved. The European banks are materially larger relative to the size of European economies than U.S. banks are. But banking liabilities are interconnected and if European banks fail they will take the large U.S. banks down with them.
Austerity policies are catastrophic for the citizens of countries that implement them because they force repayment of debts in ever more internally valuable currencies. The persistent economic weakness that these policies create produces high unemployment, falling wages and a broadly recessionary environment that can last for decades. They are being pushed because they benefit the banks but they come at the expense of the economic wellbeing of the citizens of these countries. The bind the banks put themselves in through excess leverage makes this a fight for survival from their perspective. And their use of the European and U.S. political systems to force debt repayment puts these governments on the sides of the banks and against the interests of their own citizens. Prepare for a long fight that will certainly get uglier.
Rob Urie is an artist and political economist in New York.