The Eurozone crisis was widely anticipated by American economists. For instance, Harvard's Martin Feldstein wrote in 1997 in Foreign Affairs that, "the adverse economic effects of a single currency on unemployment and inflation would outweigh any gains." Moreover, he felt a currency union was likely to lead to conflicts with the U.S. but also within Europe: Feldstein even raised the specter of the U.S. Civil War.
American economists' concerns about a single currency -- rooted perhaps in international rivalry but also the theory known as optimum currency area (OCA), a criteria that Europe does not meet -- were widely mocked by the European counterparts. Europeans economists derided the American approach as, "The euro: It can't happen. It's a bad idea. It won't last."
The euro has happened. But is it a bad idea? Will it last? Despite the reality of the full-blown depressions in Southern Europe and pauperization of the middle and working classes there, European economists have not changed their tune. Instead, apparently, the burning question for the ECB, as seen in the title of a recent speech by a board member, is "What lies behind the success of the Euro?" For mainstream European economists and politicians, questioning the wisdom of the Euro is a heresy. It is unthinkable, unspeakable, impolite.
Which is why the hard-headed look at the Euro, in the book, Crisis in the Eurozone (Verso), by economist Costas Lapavitsas and several colleagues, as well as other writings by him, is notable on multiple fronts. For one, Lapavitsas, and his coauthors, are European economists, albeit affiliated with the University of London. Secondly, Lapavitsas is a man of the left, writing from a Marxist political economy tradition, whereas most Euroskeptics come from the right fringe.
The establishment line about the Euro, once expressed to me by an EU ambassador during a reception, is "The Euro was created for peace," a formulation worthy of Brezhnev. The Euro was indeed created for geopolitical reasons but the more likely rationale was to constrain Germany and also to serve as a vehicle for French grandeur. But there were financial motives too, according to Lapavitsas: "The ruling strata of Europe determined to create a form of money capable of competing against the dollar, thereby furthering the interests of large European banks and enterprises."
The result was a German export machine that works well within the monetary union. But the periphery has been destroyed, unable to export inside or outside the Eurozone. Austerity and other forced attempts on the peripherals to close the competitive gap with Germany have instead resulted in devastated productive capacity and mass unemployment. "These countries are in a no-growth equilibrium," Lapavitsas told me. Whereas European elites counsel patience, he counsels action: it is time for a "progressive exit the Euro."
This is a still shocking statement in the context of a European left reluctant to criticize the Euro even if denunciations of "Capitalism" and "neo-liberalism" are obligatory. Behind their stodgy façade, the Euro elite are actually more radical -- and ruthless -- than any anarchist-artist or sanctimonious intellectual. They will stop at nothing to protect the Euro project, even if it ends up destroying the European project through mass unrest. The fact is, despite the devastation, certain groups are profiting enormously from the Euro as it now stands. First and foremost are German manufacturers, whose success derives almost entirely from the common currency coupled with workers' wage cuts, a point discussed extensively by Lapavitsas. Some banks, and the closely-knit Euro elite, whose allegiance is to each other rather than their countries' populations are also doing well. Even Euro-wonks, with their incremental, technical solutions, are also enjoying their unnatural position in the limelight.
A favored solution of all these groups is "structural reform" of the peripherals, say of deregulation of the food services industry, as this has any relationship to the sweeping macroeconomic severity of the crisis.
My personal belief is the true locus of the crisis, instead lies in debt markets. It stems from an unanticipated by-product of joining a currency union but not entering into a fiscal union. Europeans governments' debts are now effectively in a foreign currency, the Euro. When they attempt to devalue, their real liabilities go up. Peripherals have been urged to decrease their wages and government expenditures via austerity in order to better compete with Germany. But any successful internal devaluation has only resulted in an increase in real debts for households and governments, because the debts are measured in Euros. Real interest rates also increase. Capital outflows amplify these effects.
These vulnerabilities, of the Eurozone periphery haven't been formalized into what is known as "third generation" crisis models, but the implication is still clear: the Euro has made these countries financially fragile because their debt is no longer in a currency they control. They are susceptible to "debt-deflation" loops. Greece is in one now and Spain is on the edge.
There are other, complementary, explanations of the crisis: the peripherals joined at too high an exchange rate and their tradeable sector was wiped out. External devaluation, the most effective solution to both the debt deflation loop and the competitiveness gap -- and one favored by Lapavitsas -- is of course not allowed because these countries are in a currency union. It is one they can't legally leave. As the nightmarish saying about joining the Euro goes, it is like entering "a freeway which has no exits."
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There are signs of a thaw in European economic thinking. The European Solidarity Manifesto signed by a group of major European economists calls for "a controlled dismantlement of the Eurozone via the exit of the most competitive countries," with the goal of saving the European union. Signatories include Costas Lapavitsas from the left, but more centrist economists are represented as well.
Members of the group have different perspectives on how to accomplish an exit: Lapavitsas in his book maps out a "progressive exit" favoring labor over capital, including tight controls over capital flows and the financial sector. As he told me, after an exit option is instituted, "Europe still needs a lifting of austerity, public investment to raise productivity, and an expansionary and relaxed fiscal policy."
By speaking the unspeakable, and raising the prospect of the end of the Euro, Lapavitsas and his fellow signatories risk being called stooges of Anglo-Saxon capital, unpatriotic, or possibly insane (akin to Soviet dissidents). Yet even their critics must take heed of their analysis distinguishing the EU from the EMU, and their insight that the Euro is hindering rather than fostering European integration. And for those more interested in preserving the EU than the Euro, and ending the suffering of the peripherals, this group of heretics may someday be seen as heroes.