Table Of ContentCrisis in the Εurozone
Crisis in the Εurozone
C. Lapavitsas, A. Kaltenbrunner, G. Labrinidis, D. Lindo,
J. Meadway, J. Michell, J.P. Painceira, E. Pires, J. Powell,
A. Stenfors, N. Teles, L. Vatikiotis
Introduction by Stathis Kouvelakis
First published by Verso 2012
The collection © Verso 2012
The contributions © The contributors 2012
‘This book is a revised version of three reports on the eurozone crisis published
online by Research on Money and Finance, namely Eurozone Crisis: Beggar
Thyself and Thy Neighbour, March 2010; The Eurozone Between Austerity and
Default, September 2010; and Breaking Up? A Route Out of the Eurozone Crisis,
November 2011. The first RMF report also appeared as an article in the Journal
of Balkan and Near Eastern Studies, vol. 12, issue 4. The authors would like to
thank the journal for permission to republish this material.
All rights reserved
The moral rights of the authors have been asserted
1 3 5 7 9 10 8 6 4 2
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ISBN-13: 978-1-84467-969-0
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CONTENTS
Preface by Costas Lapavitsas ix
Acknowledgements xiii
Introduction: The End of Europeanism by Stathis Kouvelakis xiv
Glossary xxii
PART 1 BEGGAR THYSELF AND THY NEIGHBOUR
1 Several dimensions of a public debt crisis 1
A crisis with deep roots 1
Institutional bias and malfunction in the eurozone 2
Peripheral countries in the shadow of Germany 4
The impact of the crisis of 2007–9 and the role of finance 5
Policy options for peripheral countries 7
The order of analysis in Part 1 11
2 Macroeconomic performance: Stagnation in Germany,
bubbles in the periphery 13
Growth, unemployment and inflation 13
Investment and consumption 16
Debt 19
3 L abour remuneration and productivity: A general squeeze,
but more effective in Germany 22
A race to the bottom 22
The determinants of German competitive success 23
Real compensation and the share of labour in output 26
vi CRISIS IN THE EUROzONE
4 I nternational transactions: Trade and capital flows
in the shadow of Germany 29
Current account: Surplus for Germany, deficits for periphery 29
Financial account: German FDI and bank lending
to the periphery 31
5 R ising public sector borrowing: Dealing with failed banks
and worsening recession 35
The straitjacket on fiscal policy 35
Rising public deficits and debt due to the crisis 37
6 Th e financial sector: How to create a global crisis
and then benefit from it 42
A n institutional framework that favours financial
but also productive capital 42
B anking in the eurozone: The core becomes exposed
to the periphery 44
ECB operations allow banks to restrict their lending 51
Sovereign debt rises 53
A hothouse for speculation 56
7 Political economy of alternative strategies to deal with the crisis 59
A usterity, or imposing the costs on workers
in peripheral countries 59
Reform of the eurozone: Aiming for a ‘good euro’ 63
Exit from the eurozone: Radical social and economic change 68
PART 2: THE EUROzONE BETWEEN AUSTERITY AND DEFAULT
8 Introduction 75
9 A profusion of debt: If you cannot compete, keep borrowing 79
The magnitude of peripheral debt 79
The economic roots of external debt 84
The composition of peripheral debt: Domestic
financialisation and external flows 91
CONTENTS vii
10 Rescuing the banks once again 99
Banks in the eye of the storm 99
Funding pressures on European banks 103
The European support package and its aims 107
The chances of success of the rescue package 111
11 Society pays the price: Austerity and further liberalisation 113
The spread of austerity and its likely impact 114
The periphery takes the brunt of austerity policy 119
Mission impossible? 121
12 The spectre of default in Europe 126
Default, debt renegotiation and exit 126
Creditor-led default: Reinforcing the straitjacket
of the eurozone 128
Debtor-led default and the feasibility of exit from
the eurozone 130
Appendix 2A The crisis last time: Argentina and Russia 136
The Washington Consensus brings collapse to Buenos Aires 136
Some lessons from Argentina 140
Russia’s transition from a planned economy:
Collapse and recovery 142
Default is not such a disaster, after all 145
Appendix 2B Construction of aggregate debt profiles 147
Greece 149
Appendix 2C Decomposition of aggregate demand 153
PART 3: BREAKING UP? A RADICAL ROUTE OUT OF THE EUROzONE CRISIS
13 Hitting the buffers 155
A global upheaval 155
The euro: A novel form of international reserve currency 156
The euro mediates the global crisis in Europe 159
viii CRISIS IN THE EUROzONE
14 M onetary disunion: Institutional malfunctioning
and power relations 166
The ECB and the limits of liquidity provision 167
EFSF and ESM fumbling 176
15 Failing austerity: Class interests and institutional fixes 180
Virtuous austerity: Hurting without working 180
Desperately searching for alternatives 184
16 Centrifugal finance: Re-strengthened links between banks
and nation states 193
The re-strengthening of national financial relations 193
Greek banks draw closer to the Greek state 202
17 The social and political significance of breaking up 207
The context of rupture 207
Modalities of default 211
18 Default and exit: Cutting the Gordian knot 215
Greece defaults but stays in the EMU 219
Greece defaults and exits the EMU 222
In lieu of a conclusion 238
Index 239
PREFACE
The storm buffeting the common currency of Europe is an integral part of
the great crisis that commenced in 2007. Barely five years after bank specula-
tion in the US real estate market had caused international money markets to
freeze, three peripheral countries of the eurozone were in receipt of bailout
programmes, Greece was on the brink of exiting the monetary union, and the
mechanisms of the euro faced breaking pressure.
The causal chain linking US financial market turmoil to European Mone-
tary Union instability has been analysed by several economists, including those
authoring the present book. Summarily put, the collapse of Lehman Broth-
ers in 2008 led to a major financial crisis that ushered in a global recession;
the result was rising fiscal deficits for several leading countries of the world
economy. For countries in the eurozone periphery, already deeply indebted
after years of weakening competitiveness relative to the eurozone core, fiscal
deficits led to restricted access to international bond markets. Peripheral states
were threatened with insolvency, posing a risk to the European banks that were
among the major lenders to the periphery. To rescue the banks, the eurozone
had to bail out peripheral states. But bailouts were accompanied by austerity
that induced deep recessions and rendered it hard to remain in the monetary
union, particularly for Greece.
The threat to the euro would perhaps have been understood earlier had
more attention been paid to history. In 1929 speculation in the New York Stock
Exchange induced a crash that led to global recession; by 1932 it had become
necessary to abandon the gold standard that had only been reintroduced in
1926. The recessionary forces in the world economy had grown vast in part
because states had been trying to protect gold reserves and associated fixed
exchange rates. It became impossible to cling on to the rigid system of metallic
world money.
