John Grahl (Professor of European Integration at Middlesex University) reviews Crisis in the Eurozone by Costas Lapavitsas et al.(Verso 2012)
Costas Lapavitsas, professor of economics at the School of Oriental and African Studies (SOAS) in London University, has become well known recently as the most prominent left-wing advocate of “Grexit,” Greek departure from the eurozone.
Many of the papers in which this course of action is proposed have been jointly written by Costas and several of his colleagues as members of a research group based at SOAS, Research on Money and Finance (RMF), although not all researchers in the group necessarily agree with the proposal. Crisis in the Eurozone brings together three such papers, written between March 2010 and November 2011.
It is important to say straight away that only a small part of the book is devoted to the arguments for Grexit. The book as a whole is an analysis of the eurozone crisis, its origins, its effects and the policy responses to it so far.
As analysis the book is highly recommended. It argues, in the reviewer's opinion very correctly, that the dislocation of the eurozone derives from the structural weaknesses of the European monetary union itself and from the global financial crisis. The preceding boom in global finance at first disguised, and in doing so aggravated, the growing imbalances in the eurozone; the crisis then revealed them in the harshest light.
The book combines detailed but lucid analysis of the complex financial and economic processes at work with a clear account of the political context and of the reactionary nature of the policies currently being imposed, especially on the economically weakest countries, by the EU and its dominant states, above all the German state.
However, the rest of this review will be devoted to the issue of Greece leaving the eurozone, because of the political importance of this question. The position taken here is that this is an incorrect strategy. It is impossible to be sure of this but the unavoidable doubts relate to the huge uncertainties surrounding the project and these uncertainties are themselves strong arguments against it.
It is significant here that when the book turns to the question of Grexit, indicative clauses give way to conditional ones, “is” to “might be.”
For example: “To keep the analysis manageable.....only the first order effects on European banks, the ECB and other institutions are considered. Effects of a further order, for instance, through the interbank market, are left out of account because the degree of complexity would be simply forbidding.” (page 207). The real problems are likely to be even less manageable than the analytical ones.
Or again, “The real analytical difficulty lies not in working out the likely long-term results [of Grexit] but in ascertaining the adjustment path, especially during the initial period.” (page 223).
And again, “Real incomes, in particular, would be likely to fluctuate in unpredictable directions.” (page 223). “The price system and the domestic functioning of the new drachma would probably settle down within a few months.” (page 233). But perhaps not.
In other words, Greek people are being encouraged to make a huge leap in the dark, with possibly very adverse consequences. This is justifiable if the alternative to making the leap is certain catastrophe — one leaps into a turbulent sea rather than go under with a sinking ship. But dreadful though the actual plight of Greece is, it is difficult to see a catastrophe of those dimensions.
The preface to the book, by Stathis Kouvelakis, states, “Let us note that the method followed here by Lapavitsas and his colleagues is faithful to what a certain tradition of the workers’ movement has called ‘transitional demands’.” (page xxi)
The reviewer does not adhere to that tradition but a transitional demand, one that is intended to launch a political dynamic towards more radical and more comprehensive political and economic transformation, seems to him to be acceptable, provided that this intention is acknowledged and explained to those to whom the demand is being recommended. Otherwise it would be more accurate to speak of a manipulative demand.
Two specific arguments against Grexit will now be advanced (there are several others for which space is lacking).
The first concerns the actual introduction of a new national currency, which everyone calls the drachma. In the book, it is assumed that this introduction would be relatively easy. The second concerns the functioning of the economy on the assumption that the drachma has indeed been successfully introduced.
Beginning students of economics learn that money rests on a social convention: it is accepted because it is accepted. Likewise a potential monetary object is rejected because it is rejected. “The monetary problem of switching is conceptually trivial, although it presents several technical complexities.” (page 231).
The problems are only conceptually trivial if it is assumed, quite wrongly, that they are of a technical nature. Why should businesses or individuals in Greece accept the drachma? State employees and pensioners might have no choice, although many of them would be extremely reluctant. Even with the drastic reductions in their euro incomes which have taken place, the purchasing power of those incomes is at present relatively stable. It is bound to fall to an unpredictable level if the drachma is introduced. As is completely recognised in the book, a substantial depreciation from the initial conversion rate of drachmas into euros is unavoidable.
The state employees and pensioners might take the drachmas and seek to change them into hard currency as quickly as possible and at any rate that was available. But what about the private sector?
Greece has a very large number of small businesses and a huge “informal” sector, where the writ of the authorities hardly runs. Would these businesses and workers accept the drachma? They would certainly not refuse the euro. If, then, they were ready to accept both currencies, would they be prepared to do so at a relatively stable conversion rate between the two or would they put continuous downward pressure on that rate by cutting their euro prices and raising their drachma ones?
It is recognised in the book that capital controls would be needed. “....it might be possible to exercise some controlling influence on the exchange rate through administrative controls on particular foreign exchange transactions, and through controls over capital flows.” (page 233). Are such controls feasible in the Greek case? It would not be possible to use the Greek banking system to transfer capital out of the country because an immediate consequence of Grexit would be the isolation of that system.
But how could cash movements and movements via the millions of external bank accounts held by Greeks be blocked in a mercantile nation with a huge diaspora and interconnections with other countries which are as varied in kind as they are unlimited in number? It is not made clear in the book that “administrative controls” would have to require the surrender to the authorities, at an official exchange rate, of the hard currency revenues of businesses exporting goods and services. Otherwise imports would soon cease.
Could such an obligation be imposed on the owners of Greece’s mercantile fleet? What about the key tourist industry? Could tens of thousands of cafés, hotels and tavernas be compelled to declare and surrender their euro receipts?
It seems to be assumed in the book that the drachma would be rendered acceptable by the government requiring it to be used to pay taxes (and perhaps bus fares). This is a weak reed to stand upon — taxpayers might use drachmas to pay their taxes and for no other purpose. Even if the drachma was used to a certain extent in exchange it would become neither a unit of account (everyone would continue to calculate in euros) nor a store of value — who would hold drachma denominated assets?
“Once the new drachma found itself in circulation it would take time to gain public confidence.” (page 232). How is this interval to be bridged? How can an object in which there is no public confidence “find itself” in circulation? The French economists, André Orléan and Michel Aglietta, have shown the frequently close association between the birth of monetary regimes, often linked to the establishment of state sovereignty, and the use of social violence. Would violence be necessary to reclaim the sovereignty of the Greek state and put the drachma into circulation? If so, how much violence, of what kind and against whom? How could the contagious spread of violence be avoided?
There is a logic to the imposition of comprehensive economic controls which can indeed be “transitional” in the sense specified above. One begins with “administrative controls” and ends with a state monopoly of foreign trade. Since that kind of North Korean logic is not applicable to Greece it is necessary to think hard about the limits to the range, feasibility and effectiveness of the controls that are envisaged.
A lot could be done in terms of tax revenues and the functioning of labour markets. External trade and payments pose much more difficult questions.
As regards taxes the book states, “Restructuring the tax system would also eliminate institutionalised tax evasion by the ship-owners, the Orthodox Church, and the banks.” (page 230). One can only agree, but the restructuring proposed does not depend on, and might well be impaired by, re-introduction of the drachma. These very usual suspects would be happy to pay in super-abundant drachma and keep their hard currency for themselves.
The second objection which will be raised concerns the management of the exchange rate after the drachma has been, by assumption, re-established.
To maintain a trade balance in the short to medium term (a trade deficit would be impossible to finance) it would be necessary to depreciate the exchange rate. On page 234 we find the following howler: “.....currency depreciation does not work by reducing workers' income. This is a misconception that is often purposely cultivated in the media and elsewhere. Rather, depreciation works by changing the relative price of imports and exports, therefore influencing demand.” Demand for imports is indeed discouraged by their rising prices but these rising prices most certainly constitute a reduction in the real incomes of the population.
To some extent exports are stimulated by hard currency price reductions but this is not the main mechanism. Especially in the short run, exports are stimulated by the widening margin, both in drachmas and euros, between their costs and their relatively stable euro prices — that is by a supply effect responding to higher profits. The point is made to qualify the repeated assertion in the book that Grexit could be combined with big redistributions towards labour. Rapid correction of a balance of payments deficit via depreciation involves a significant transfer from wages to profits.
Nothing that has been said should be taken as suggesting that Greek people should accept the status quo. “The Memorandum of Understanding” imposed on Greece by the “troika” (European Union, European Central Bank and International Monetary Fund) as a condition for very limited refinance, permitting the government just to service its debts, is a shameful document. It not only imposes impossible targets for public finance, it deprives the Greeks of any choice at all in how they endeavour to meet the targets and it does so in a humiliating way. It strikes at the essence of the Greek industrial relations system and at Greece’s (very inadequate) systems of social provision. The impoverishment which has followed this tutelage, comparable to the injustices of colonialism, is alarming. Greek rejection of this regime would be completely justified and in the interests of the Greek people.
Rather it is suggested that Greek rejection of the troika regime need not involve substituting a new drachma for the euro and that it would be advantageous to stay in the eurozone (there is no legal provision permitting expulsion from the monetary union) but at the same time ceasing to service the unpayable mountain of state debt or to implement the Memorandum.
Such a stance would put much more pressure on the EU to resolve what would remain a dangerous internal problem of the zone; while Greek departure would actually be welcome to some of the most hard-line reactionary forces in the EU who take the view that, to adapt Voltaire, from time to time it is necessary to kick a country out of the monetary union to encourage the others. Greek revolt within the eurozone would also be more likely to find a positive response in the other clients and potential clients of the troika — Ireland, Latvia, Romania, Portugal, Italy, Spain, Cyprus and perhaps others — because it would not present them with the dilemma — either comply with the troika demands or quit the monetary union.
There would of course be great difficulties with a debt default inside the euro. In particular the banking system would be insolvent and financial pressures would impose an almost immediate elimination of the trade deficit. But, in spite of the assertions in the book, it is impossible to say that these problems would be greater than those either of continuing to accept the Memorandum or of the leap to a new currency.
One of the few analytical weaknesses of the book is a tendency to simplify the options available to different parties: either more austerity, or default by the weaker countries within the monetary union, or departure. The first two admit of many variants and many compromises — including a retreat by the troika and an advance by the indebted countries. It is true that a departure strategy does not admit of such variation and adjustment but this is a weakness of the departure strategy, not a strength.
Finally, it is worth emphasising a political point which is made repeatedly in the book: exit from the euro could only represent a progressive move if it were undertaken as part of a very radical progressive strategy, sharply asserting popular interests against those of the corporations and the elites. Otherwise, “exit could also be ‘conservative’, that is, led by private interests keen to protect the existing balance of social forces, and persevering with the austerity.” (page 208).
The book itself, however, recognises that support for such a radical and progressive departure is not yet sufficient. In the absence of what seems to the reviewer to be an extremely improbable political polarisation the case for Grexit from Costas and his colleagues will therefore remain academic,whatever its economic strengths or weaknesses.
However, this is not a book primarily about Grexit, but an overall analysis of the unfolding crisis in the eurozone. As such it is strongly recommended.