Crisis in the Eurozone. Costas Lapavitsas

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      Part 1 BEGGAR THYSELF AND THY NEIGHBOUR

      C. Lapavitsas, A. Kaltenbrunner, D. Lindo, J. Michell, J.P. Painceira, E. Pires, J. Powell, A. Stenfors, N. Teles

      March 2010

1. SEVERAL DIMENSIONS OF A PUBLIC DEBT CRISIS

A crisis with deep roots

      The sovereign debt crisis that broke out in Greece at the end of 2009 is fundamentally due to the precarious integration of peripheral countries in the eurozone. Its immediate causes, however, lie with the crisis of 2007–9. Speculative mortgage lending by US financial institutions, and trading of resultant derivative securities by international banks created a vast bubble in 2001–7, leading to crisis and recession. State provision of liquidity and capital in 2008–9 rescued the banks, while state expenditure prevented a worsening of the recession. The result in the eurozone was a sovereign debt crisis, exacerbated by the structural weaknesses of monetary union.

      The crisis of public debt, thus, represents Stage Two of an upheaval that started in 2007 and can be called a crisis of financialisation.1 Mature economies have become ‘financialised’ during the last three decades resulting in growing weight of finance relative to production. Large corporations have come to rely less on banks, while becoming more engaged in financial markets. Households have become heavily involved in the financial system through assets (pension and insurance) and liabilities (mortgage and unsecured debt). Banks have been transformed, seeking profits through fees, commissions and trading, rebalancing their activities toward households rather than corporations. Financial profit has emerged as a large part of total profit.2

      But financialisation has unfolded in different ways across mature countries, including those within the European Union. Germany has avoided the explosion of household debt that recently took place in other mature countries and peripheral eurozone countries. The performance of the German economy has been mediocre for many years, while great pressure has been applied on German workers’ pay and conditions. The main source of growth for Germany has been its current account surplus inside the eurozone, resulting from pressure on pay and conditions rather than on superior productivity growth. This surplus has been recycled through foreign direct investment and German bank lending to peripheral countries and beyond.

      The implications for the eurozone have been severe. Financialisation in the periphery has proceeded within the framework of the monetary union and under the dominant shadow of Germany. Peripheral economies have acquired entrenched current account deficits. Growth has come from expansion of consumption financed by expanding household debt, or from investment bubbles characterised by real estate speculation. There has been a general rise of indebtedness, whether of households or corporations. Meanwhile, pressure has been applied to workers’ pay and conditions across the periphery, but not as persistently as in Germany. The integration of peripheral countries in the eurozone, then, has been precarious, leaving them vulnerable to the crisis of 2007–9 and eventually leading to the sovereign debt crisis.

Institutional bias and malfunction in the eurozone

      The institutional mechanisms surrounding the euro have been an integral part of the crisis. To be more specific, European Monetary Union is supported by a host of treaties and multilateral agreements, including the Maastricht Treaty, the Stability and Growth Pact and the Lisbon Strategy. It is also supported by the European Central Bank, in charge of monetary policy across the eurozone. The combination of these institutions has produced a mix of monetary, fiscal, and labour market policies with powerful social implications.

      A single monetary policy has been applied across the eurozone. The ECB has targeted inflation and focused exclusively on the domestic value of money. To attain this target the ECB has taken cognisance of conditions primarily in core countries rather than assigning equal weight to all. In practice this has meant low interest rates across the eurozone. Further, the ECB has operated deficiently since it has not been allowed to acquire and manage state debt. And nor has it actively opposed financial speculation against member states. As a result, the ECB has emerged as protector of financial interests and guarantor of financialisation in the eurozone.

      Fiscal policy has been placed under the tight constraints of the Stability and Growth Pact, though considerable residual sovereignty has remained with member states. Fiscal discipline has been vital to the acceptability of the euro as international reserve, allowing the euro to act as world money.3 Since it lacks a unitary state and polity, the eurozone has not had either an integrated tax system or fiscal transfers between areas. In practice, fiscal rules have been applied with some laxity in core countries and elsewhere. Peripheral countries have attempted to disguise budget deficits in a variety of ways. Nonetheless, fiscal stringency has prevailed during this period.

      Given these constraints, national competitiveness within the eurozone has depended on the conditions of work and the performance of labour markets, and in this regard EU policy has been unambiguous. The European Employment Strategy has encouraged greater flexibility of employment as well as more part-time and temporary work. There has been considerable pressure on pay and conditions resulting in a race to the bottom across the eurozone. The actual application of this policy has, however, varied considerably, depending on welfare systems, trade union organisation, and social and political history.

      It is apparent that the institutions of the eurozone are more than plain technical arrangements to support the euro as domestic common currency as well as world money. Rather, they have had profound social and political implications. They have protected the interests of financial capital by lowering inflation, fostering liberalisation, and ensuring rescue operations in times of crisis. They have also worsened the position of labour compared to capital. And not least, they have facilitated the domination of the eurozone by Germany at the expense of peripheral countries.

Peripheral countries in the shadow of Germany

      Peripheral countries joined the euro at generally high rates of exchange – ostensibly to control inflation – thereby signing away some competitiveness at the outset. Since monetary policy has been set by the ECB and fiscal policy has been constrained by the Stability СКАЧАТЬ