Why the EU/IMF package won't help the people of Greece

Submitted by martin on 25 May, 2010 - 11:28 Author: Costas Lapavitsas
Costas Lapavitsas

Costas Lapavitsas, author of a recent report on the eurozone crisis, spoke to Solidarity.

Q. A bit under two years ago, the governments of the leading capitalist countries introduced huge bail-out packages for the banks, which did succeed in stopping the banks going bust. Will the European Union/ IMF package of 10 May do the same for Greece?

A. The best way of answering this question would be to point out the differences between the two situations. In 2007-9, US, UK and German banks were running out of liquidity [ready cash] because of the bubble and the speculative games they had played. The banks were also close to insolvency because of losses.

Intervention by the state was quite successful in stabilizing the condition of the banks. But it did not resolve the underlying bank weakness, which has carried over to the present upheaval. This is a link between what happened two years ago and what is happening now.

The sovereign debt crisis of 2009-10, pivoting on Greece, is not a matter of a set of financial institutions running into trouble. It is a problem of state debt - inability of a state to borrow, and possibly inability of a state to pay its debts in the short and medium term.

This is the context of the huge EU/IMF package for all peripheral countries, as well as of the earlier one for Greece. The liquidity problem of Greece - its ability to finance its debts on a year-to-year basis - will indeed be tackled by the measures. The Greeks now do not have to go to the international financial markets to borrow, and there is no immediate problem of liquidity.

But the question of whether the Greeks will later be able to return to the financial markets without support is a very different matter. The package does not tackle that problem, which arises from the way in which the Greek economy has been integrated into the broader eurozone. This is a problem that cannot be resolved by throwing money at it. And it cannot be resolved by the IMF policies accompanying the package. On the contrary, it will probably become worse as a result of those policies.

What the package does, then, is to offer further protection to the banks of large European countries. It is money ostensibly given to Greece and other peripheral countries, but in reality to the banks. The EU and the IMF have made this money available because the underlying weakness of the banks has been revealed again.

In this way the package buys time for the Greek ruling class to allow for a desperate last attempt to find some unlikely way out. It also buys time for the various European ruling classes to prepare for the situation in which the Greek ruling class might not be able to repay its debt.

Q. The measures of autumn 2008 shifted the focus of the crisis, as regards breakdowns in the circuits of capital, from the banks to the states. So is what we're seeing now - in Greece and in other countries - really a shifted version of the crisis of 2008?

A. We are dealing, really, with one crisis, which started in 2007 and keeps unfolding and acquiring different characteristics. We might think of current events as the second stage of the great crisis. The two stages are connected, first, through the actions of states and, second, through the underlying weakness of the banks and the financial system.

The first stage pivoted on the banks and the financial system reflecting the financialisation of capitalism in the preceding period. The banks had undertaken extreme speculation during the bubble, which weakened them and made them come close to bankruptcy.

State intervention then averted the worst by making lots of money available to banks. Nonetheless, the crisis moved to the productive sector and became a deep recession with rising unemployment. Consequently, there has been a collapse of state revenues. Together with the large amounts of money made available to banks, this has led to a crisis of state finances.

The second stage emerged as states faced increasing pressure to enter international financial markets, attempting to borrow at the worst possible moment. This led to a sovereign debt crisis [of debts owed by governments]. The most dangerous aspect of this phase of the crisis is that banks themselves have started to become weak again as a result of states running into difficulties. This is because banks hold a lot of state debts, and the fear among banks of possible state bankruptcies has led to increasing mistrust among the banks.

We might see a re-emergence of a banking crisis, possibly even worse than the one in 2008-9. It would be worse because banks have remained in a weak position and their recovery since 2008 has been entirely state-manufactured. That is why the leadership of the eurozone has intervened with such alacrity in the last few weeks. They have belatedly realised that banks might be in a very precarious position.

Q. And how great is the danger now of a euro-crisis - of a catastrophic collapse in the exchange-rate of the euro?

A. The crisis has revealed the fundamental weaknesses as well as the exploitative, hierarchical - in a sense, imperialist - character of the eurozone.

The main problem is not the one that a lot of people keep talking about - that in the eurozone there is one monetary policy [i.e. one policy, set by the European Central Bank, for regulating the supply of money and official interest rates] but many fiscal policies [i.e. many policies for government taxation and spending, set by the different eurozone governments].

It is true that this is a problem, particularly from the perspective of capitalist integration. But it is not really the fundamental problem.

The real problem is the nature of the integration which the eurozone has effected in Europe. In short, the eurozone has recreated a structure of core-periphery in Europe.

One periphery, clearly very poor and exploited, is in Eastern Europe. These are countries with weak welfare systems, weak trade unions, and so on, which are suppliers of cheap labour power to the countries of the centre. Yet, there is another periphery, within the eurozone, mostly in the south but also including Ireland.

This pattern confirms that the creation of centre-periphery relations is fundamental to capitalism. It tends to happen time and time again.

The way it has emerged in the eurozone, however, is through the exploitation of workers across both centre and periphery. Workers in the centre have suffered enormously in terms of wages and conditions, and in fact more heavily than workers in the periphery. On that basis the capitalists of the centre have been able to get competitive advantage over the capitalists of the periphery. And so there have been growing divergences between centre and periphery, expressed in escalating trade deficits for the countries of the periphery.

This is the underlying and fundamental reason for the weakness of the euro, and as far as I can see, the ruling classes of both centre and periphery have no ideas about how to deal with it.

Q. Why should that make the euro necessarily more unstable than the currencies of states with enormous regional differences? Than the currencies of Brazil and India, for example, which have regional differences within their countries bigger than the differences between countries in the eurozone?

A. This is where the basic political weaknesses of the eurozone come into play. The eurozone is an alliance of states, and its ability to make fiscal transfers that can alleviate the tensions between its various components is very limited.

This fact too is connected to the centre-periphery or imperialist aspect of the eurozone. Those who rule the countries of the centre do not want a mechanism that would bring about the fiscal transfers which could perhaps provide more stability.

Some people on the left fantasise about creating a federal state across Europe that would alleviate the problems. But we should realise that a socialist United States of Europe is not on the cards at the moment. A federal European state, in the very unlikely event that it emerged, would be fundamentally undemocratic, anyway.

Q. Why?

A. Because such a state would not arise from below. There is no mechanism that would provide it with democratic legitimacy among broad masses of workers and others.

Q. But pretty much every democratic state - in the sense of the inadequate sort of democracy that exists anywhere now - has been imposed from above. For example, the French state was welded into one unit pretty much from above, from Paris.

A. Since we are talking about fiscal transfers, a fundamental principle is "no taxation without representation". This is, of course, a bourgeois principle, not a socialist principle. But it is fundamental to the legitimacy of bourgeois states - that is the ability of a central power to impose fiscal charges, and make fiscal transfers. This principle is also connected to electoral rights. Therefore it provides some legitimacy for the state among broader layers of people, even though it is a very limited democracy, to be sure. A federal European state would have none of that, and it is unlikely that it could acquire it.

Q. When we talked in 2008, I asked whether you thought that the bail-out programmes, partly designed to combat deflation [falling prices], might lead to sizeable inflation. Your answer, partly based on the experience of Japan, was no. Does that issue look the same to you now?

A. There has not been a problem with inflation at all similar to what occurred in the 1970s, that is, rates in the region of 15%, 20% and more. Inflation has picked up, but is still at a very low level.

There are a lot of forces stacked up against the possibility of escalating inflation. Banks are hoarding the money that has been pumped into the system. Unemployment and job uncertainty are keeping nominal wages down. There is a lot of fear and insecurity across society. It looks unlikely that inflation will return to the levels of the 1970s.

Q. I'm puzzled by the balanced-budget amendments to the constitution which have been introduced in Germany, and in a softer form in France. These governments have just been through an experience when they ran very unbalanced budgets as the only way to limit an economic crisis, and now they're introducing constitutional amendments to rule that out in future.

A. At the level of economic theory, this move represents an incredible re-emergence of ancient orthodoxies which had been thought to have been dead for many, many years. These are the orthodoxies of the 1920s and of the early 1930s, before Keynes.

It is a re-emergence of the idea that in a crisis a capitalist government needs to allow the system to cleanse itself, while tightening up its finances. After that, capitalist accumulation will be re-born. But we know this view is plain nonsense in mature, decrepit capitalism.

That we see this idea re-emerging at the top of the European Union shows intellectual bankruptcy at the very top. The ruling classes of Europe seem to be completely bereft of ideas, indeed to have regressed to ancient fallacies.

Why are they doing it? This is a very difficult question to answer, but remember that the eurozone is a very peculiar structure. It brings pressure on workers across both centre and periphery, as I have already mentioned. Who has benefited from this structure? It is not workers at the centre, or even capitalist accumulation as a whole at the centre, which has been weak in the last decade. It is not capitalist accumulation in the periphery, since these countries are now close to bankruptcy.

The sector that has clearly benefited from the euro is the banks. The euro has allowed the European banks to operate globally with a "hard" currency and to acquire dollar assets cheaply.

In a similar way, the absurd policies of imposing austerity in the midst of a recession smack of narrow banking logic. They might damage many other areas of accumulation but they help the banks, at least in the short term, by protecting the relative value of the euro.

Q. The banks are the ones who benefit from the euro? But German banks could operate internationally with the deutschmark. British banks are quite happy to operate with the pound, and are not clamouring for Britain to adopt the euro. There is also a way in which the banks lost out with the introduction of the euro, and some financiers complained about it at the time: they lost the fees from a vast range of foreign-exchange transactions.

A. It is true that over the last couple of decades banks have increasingly made profits out of fees and commissions. But those fees and commissions are not necessarily associated with foreign exchange and arise from general trading of banks in financial markets.

The euro, over the last ten years, has had what is called an appreciation bias, that is, it has tended to rise relative to the dollar. That has been fundamental for the banks.

It has allowed banks to acquire dollar assets more cheaply. And so the expansion of assets held by eurozone banks - German, French, and Dutch, primarily - has been much faster than the average of banks worldwide. An added advantage for the banks is that the euro has found its way into the portfolios of the rich and of states across the world. The euro has become the number two currency for reserve hoards, after the dollar.

While the euro was getting stronger, European industrial capital adapted by putting extra pressure on workers. It used that tendency of the euro to rise as an excuse and as a lever for applying pressure to keep down wage costs at the centre of the eurozone.

Q. In the report on the eurozone crisis which you have recently written with other economists, you talk about two forms of exit from the eurozone for Greece, "bad" and "good". But under any government such as Greece has, or is likely to have short of a huge transformation of the political forces in the country, the exit will be a "bad" exit.

Of course, if you had a socialist revolution in Greece, that Greece would find itself outside the eurozone. But the converse doesn't hold - that quitting the eurozone would push Greece to the left.

Sure, being in the eurozone has exploitative effects. But being outside it would probably have even greater ones. Greece would then operate with a drachma which would have collapsed in international markets, and it would still have all its debts in euros.

A. I do not agree. It isn't necessary to have a socialist revolution for exit to be positive. What is necessary is a decisive shift in the balance of forces in favour of labour. That is not the same thing as socialist revolution.

The balance of forces has been moving in favour of capital for many years now. What is required in the first instance is a decisive shift politically, economically, and socially in favour of labour. That is necessary for exit to be positive, and it could then open up the way for socialist transformation sooner rather than later.

Exit from the euro is necessarily connected to default [i.e. Greece announcing that it cannot pay its international debts]. As you pointed out, Greece's external debts would remain in euro, which would be impossible to service while operating with the drachma.

Default, or cessation of payments, is absolutely necessary for Greece and the other south European economies. The weight of debt crushing the Greek economy is unbearable, and there is no prospect of sustained growth to deal with it in the near future.

It is true that the shock of exit and default, for Greece, or any other small economy, would be great. The devaluation of the country's currency would make it possible to restart production and to protect employment, but it would also hit workers through higher prices for imported goods.

To confront these problems it would be important that profound political change should also take place. It would then be possible to introduce measure to protect people's living standards through tax policy and through social provision and transfers.

It would also be possible to take public control over other areas of the economy, including the banks. Once that had happened, the country could put industrial policy in place that would seek to change the direction of the economy to ensure growth and employment.

It is incredibly pessimistic to think that such a path is not feasible. The crisis is an opportunity. The ruling class sees it as an opportunity to squeeze workers hard. But it is equally an opportunity for the working class and the forces of the left to change things against capital.

Q. But look at Mexico and Brazil in the 1980s. Default shifted the balance of class forces in those countries in the other direction, and working classes which had a formidable history of struggle were absolutely pounded.

There was an era of capitalism when governments defaulted quite frequently and without drama. But today capitalist governments are much more involved in the international financial markets. The pressures on a government which defaults then to seek deals to get back into the international financial markets are much greater.

A. Default is not the ogre that it is made out to be. There have been many defaults in recent decades, none of them catastrophic. In fact, evidence from the IMF, no less, indicates that the costs of default are not that great in terms of loss of output, employment, and so on. After default and devaluation, economies tend to enter recovery within the space of about six to eight months.

In Argentina, the economy began to grow rapidly a few months after default in 2001. In fact, the heaviest damage in Argentina happened on the way to default, when the ruling class was trying to hold on to the nonsensical system of tying its currency to the dollar.

Much of the damage occurred because the country did not decide coherently to go for default, but was dragged into it slowly. It defaulted on some debt first, then on other debt later. When it finally decided on complete cessation of payments, chaos ensued for several months, it is true. But even in the case of Argentina, after those months of chaos, the economy recovered very quickly.

Default has costs for working people, to be sure. But they are costs that can be handled, and they are nothing like the severe costs imposed on working people by trying to remain within a monetary system that is clearly unsustainable and imposing recession. Look at what is happening at the moment in the Baltic states, which are trying to hold on to exchange rates that are unsustainable. The costs have been catastrophic.

Default is the least costly option for working people and for the economy as a whole. The option currently followed by the Greek ruling class at the moment leads to disaster.

As for the politics - it is very difficult to generalise as to how countries and working-class movements would behave in response to such shocks. What I can tell you is that at the moment the Greek working class and the Greek people are looking for answers to the Left and not to the Right.

People have been shocked by the government's measures, and they are waiting for the Left to come up with answers that will credibly resolve the social crisis. If the Left proposes a series of steps that shifts the balance of forces against capital, and gets society out of the impasse, I think people will support it.

Q. What political forces, existing or coming-into-existence in Greece, do you think might be the agency for this "good exit"?

A. There is a need for a social alliance, and a political front. There must be an alliance of classes and social layers that are being severely hit by this crisis. At the heart of that must lie the working class.

This is the most organised, compact, coherent social class, with its own traditions of struggle and its own institutional memory.

But there are also large layers of the lower middle class or petty bourgeoisie in Greece - small business people, professional middle classes, and so on - which are buffeted by the crisis. They would look to the working class for social leadership, if the working class came up with a programme that would credibly take the country out of the crisis.

There are also farmers, who demonstrated their ability to organise and to take to the streets just before the crisis became severe. They would also support a programme that dealt with the crisis.

The components of the social alliance are clear - the working class at the centre, drawing to itself middle-class layers in city and country as well as poor farmers in the countryside.

Then there is the question of the political front to give leadership to the social alliance. There is no single political force in Greece that can credibly say it will lead the country and the economy out of this mess.

On the Left, toward which the country is looking at the moment, there are many problems arising from the last twenty years of decline and sectarianism, which we know in this country too. Left organisations may have common aspirations and visions, but we fall out among ourselves, we magnify differences, even personal differences become enormous... it is a cancer within the left.

Still, the pressures of the crisis are so great that there is every opportunity to create a front-type organisation in Greece that could begin to give political leadership. Actually, there are signs that such an organisation might be emerging.

Q. The Greek left has a problem unique in Europe, in the survival or even strengthening of the Greek Communist Party as a more or less thoroughly Stalinist party. It is the major force of the left on the Greek political scene at the moment. But it conducts all its activities during the crisis just as devices to scoop up more members and electoral support. It condemns the trade-union demonstrations as a matter of "yellow unions" and organises its own separate demonstrations. The differences between the rest of the left and the Greek Communist Party are not invented or exaggerated.

A. The Greek Communist Party is a product of Greek society and of the Greek Left just as much as every other organisation of the Greek Left.

Q. It wasn't called the "Greek Communist Party (Exterior)" for no reason...

A. It is easy to criticise the Communist Party, both for its history and for what it is doing at the moment. But in many ways the people on the non-Communist-Party Left originate from the same tradition and have several traits that are due to that tradition. It would be unfair to focus on the Greek Communist Party and say that is the main problem faced by the Greek Left.

The Communist Party is clearly going through an extremely sectarian phase at the moment. It refuses to say a good word about anyone else. It refuses to march with others. It refuses to undertake much common action with others. This attitude clearly undermines the necessary joint action.

But the pressure from below for common action is very great and it is probably affecting Communist Party members too. If the rest of the Left came up with credible ideas and proposals to take society out of the crisis, that would also have an impact on the Communist Party.

Q. In your report on the crisis, you also discuss a hypothesis which you call the "good euro". The basic reason you give for that hypothesis not being viable is that it would catastrophically damage the exchange-rate of the euro.

But some of the measures associated with the "good euro" perspective can be campaigned for by the left across Europe without subscribing to the perspective as "our advice to Merkel and Sarkozy" - measures like the cancellation of the Greek debt and the extension of social guarantees across the European Union.

Doing that would mean we could work to bring labour movements across Europe into activity on this crisis, rather than seeing as something to be resolved by this or that country withdrawing.

To win such measures requires a change in the balance of forces. But why are you so much more pessimistic about a change in the balance of forces on a European scale than within Greece?

A. No socialist in their right mind would say that a minimum wage policy, or social protection, across Europe would be a bad thing. Some of the ideas for a "social Europe" come from people who are genuine socialists. The idea of the socialist United States of Europe is an old socialist idea, after all.

It would be wrong to dismiss the intentions, or some of the particular ideas, put forward for the "good euro". Struggles for such measures should be supported. But the strategic sense of the proposal is very inadequate. Parts of it might be OK, but as a strategy for the Left it does not hold together.

The difficulties are of a different order compared to those of exit. It is surely very difficult for the Greek capitalist entity to pull out of the euro, and even more difficult to bring about a shift in the balance of forces against capital and in favour of labour. But it is even more difficult, indeed I would argue impossible, to bring about a cross-European alliance that would achieve the social shift required for a ‘good euro’ across the countries of the eurozone.

A point that also needs stressing is that the euro is not a kind of money that arose spontaneously allowing workers to buy what they need on a daily basis. Rather, it is money that was created from the top and was imposed on particular countries. It is money that aimed to act as world money from the start, serving the interests of particular sectors of capital in Europe.

Any attempt to turn the euro into money that would be friendly to workers would contradict its fundamental aim, and would thus create difficulties for European capital in international markets. It is already apparent how destabilising this can be as the recent fall of the euro has created enormous tensions. Any suggestion that the fiscal discipline in the eurozone would be relaxed would be enough to create a far more serious crisis for the euro in the international markets.

The last point to make here, though, has to do with the traditions of the Left. From its inception the Left has been an international force. It has always looked across borders, and if it lost that, it would lose the very sense of what it is about. But what is the true nature of internationalism, and how do we go about creating genuine international solidarity?

The existing structures of European integration have created no genuine solidarity among European people This can be seen very clearly in the war of words in the last few months, in the racism and xenophobia in the popular press of both Greece and Germany.

I would argue that the progressive exit is actually the true internationalist option. Using the traditional criteria of the Bolshevik and the revolutionary left, progressive exit is the coherent and credible internationalist option. It would set an example for the rest of the working class of Europe, and it would seek actively to mobilize support from workers across Europe.

Q. There is a more fundamental question here. The reduction of barriers between nations - barriers to the movement of people, but also even barriers to trade - is generally a step forward, even under capitalism.

The return of Europe to a system of trade-warring or military-warring states, which you had for centuries before the European Union, would not be a step forward.

Ever since the early 1960s, it has been a common view on the British left, first to oppose entry into the European Union, then to demand withdrawal, then to drop the demand for withdrawal because it seems embarrassing but to keep the same basic attitude... We have always thought that common view was wrong.

We don't support the institutions of the European Union. The bringing-down of the barriers does not remove the contradictions of capitalism.

We argue for a response to the international coordination of capital through the international coordination of working classes and of labour movements, rather than by the working class of each country seeking to remove its own country from that international coordination.

A. The progressive exit argument has got nothing to do with autarky. It is not about raising tariff barriers or shutting countries out of the international flows of commodities, capital and labour. That would not be a sensible thing to do for small countries with middling technology. And it would certainly not be a basis on which to build socialism.

Socialism is about large-scale integration, a global economy, a global society. This outcome would not come about by erecting barriers. The strongest revolutionary tradition on the left has always been against "socialism in one country".

Progressive exit is, in immediate terms, about regulating, controlling, managing the interactions of countries with the international flows. It is about not allowing the financial markets and unregulated commodity flows to dictate what happens at the level of economy and society.

After all, trade and capital flows are in practice already regulated by a number of countries. This includes the most successful countries in terms of growth, such as China, India. It is only in Europe and in some older capitalist countries that the ideology of completely free markets has prevailed so completely.

But the most important aspect of progressive exit is that it could change the balance of class force against capital. It could begin to pull economies and societies out of the current impasse, while also opening up the possibility of socialist transformation for the first time in decades. This is a great opportunity for the Left and it remains to be seen if there are sufficient social forces to realise it.


The report on the eurozone crisis written by Costas Lapavitsas and other economists is available at the "Research on Money and Finance" website.

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