Crisis in the Eurozone. Costas Lapavitsas
of its likely implications, i.e., leading to the end of monetary union; their institutional, political and social demands have to be tailored accordingly.
The third alternative is to exit from the eurozone. Even here, however, there are choices. There is ‘conservative exit’, which is increasingly discussed in the Anglo-Saxon press, and would aim at devaluation. Some of the pressure of adjustment would be passed onto the international sphere, and exports would revive. But there would also be losses for those servicing debt abroad, including banks. Workers would face wage declines as the price of tradable goods would rise. Devaluation would probably be accompanied by austerity and liberalisation, compounding the pressure on workers.
Long-term improvements in productivity would, however, occur only if market forces began spontaneously to develop new capacity in the tradable goods sector. This is extremely difficult for peripheral eurozone countries, with middling technology and middling real wages. It is notable that the ruling elites of peripheral countries are aware of these difficulties, as well as of their own lack of capacity to deal with them. They have implicitly admitted that they possess neither the means nor the will to pursue an independent path. Consequently, conservative exit might lead to stagnation with repeated devaluations and decline in incomes.
There is, finally, ‘progressive exit’ from the eurozone, which would require a shift of economic and social power toward labour in peripheral countries. There would be devaluation accompanied by cessation of payments and restructuring of public debt. To prevent collapse of the financial system there would have to be widespread nationalisation of banking, creating a system of public banks. Controls would also have to be imposed on the capital account to prevent outflows of capital. To protect output and employment, finally, it would be necessary to expand public ownership over key areas of the economy, including public utilities, transport and energy.
On this basis, it would be possible to develop industrial policy that could combine public resources with public credit. There are broad areas of the national economy in peripheral countries that call for public investment, including infrastructure. Opportunities exist to develop new fields of activity in the ‘green’ economy. Investment growth would provide a basis on which to improve productivity, ever the Achilles heel of peripheral economies. Financialisation could then begin to be reversed by lessening the relative weight of finance.
A radical policy shift of this type would require transforming the state by establishing mechanisms of transparency and accountability. The tax and transfer payments of the state would then take a different shape. The tax base would be broadened by limiting tax evasion by the rich as well as by capital. Public provision for health and education would be gradually improved, as would redistribution policies to alleviate high inequality in peripheral countries.
A policy of progressive exit for peripheral countries would come with evident costs and risks. The broad political alliances necessary to support such a shift do not exist at present. This absence, incidentally, is not necessarily due to lack of popular support for radical change. More important is that no credible political force in Europe has had the boldness to oppose austerity hitherto. Beyond political difficulties, a major problem for progressive exit would be to avoid turning into national autarky. Peripheral countries are often small and need to maintain access to international trade and investment, particularly within Europe; they also need technology transfer.
International alliances and support would be necessary in order to sustain flows of trade, skills and investment. These would be far from easy to secure if the rest of the EU remained under the spell of monetary union. But note that progressive exit by the periphery would also offer fresh prospects to core eurozone countries, particularly to labour which has suffered throughout this period. If the eurozone unravelled generally, economic relations between core and periphery could be put on a more cooperative basis.
The order of analysis in Part 1
Part 1 focuses on the peripheral countries of the eurozone, above all, Greece, Portugal, Spain and Ireland. When appropriate, Italian data and performance have also been considered, though Italy cannot easily be considered a peripheral country to the EU. The core of the eurozone is taken to comprise Germany, France, Belgium and the Netherlands.5 Comparisons are usually made with Germany, the leading country of the core and the EU as a whole. The introduction of the euro in 1999 – and 2001 for Greece – provides a natural point of reference for all comparisons. Each country has had its own distinctive institutional, social and historical trajectory, and therefore some pretty brutal generalisations are deployed below. But there are also evident commonalities which derive in large part from worldwide patterns of economic development in recent years, as well as from the nature of the EU and the eurozone.
Thus, chapter 2 discusses macroeconomic performance of peripheral countries compared to Germany. Chapter 3 moves to labour markets, the remuneration of labour and the patterns of productivity growth. Chapter 4 then turns to international transactions particularly within the eurozone. On this basis, chapter 5 considers the evolution of public finance and the expansion of public indebtedness after 2007. Chapter 6 places the growth of public debt in the context of the operations and performance of the financial sector following the crisis of 2007–9. Chapter 7 concludes by considering the alternatives available to peripheral countries.
2. MACROECONOMIC PERFORMANCE: STAGNATION IN GERMANY, BUBBLES IN THE PERIPHERY
Growth, unemployment and inflation
Growth rates among the countries in the sample were generally lower in the 2000s than in the 1990s (fig. 1). This fits the pattern of steadily declining growth rates across developed countries since the late 1970s. But there is also significant variation. Ireland registered very high rates of growth in the 1990s, driven by investment by US multinational corporations that were given tax breaks. Profit repatriation has been substantial, creating a large disparity between Irish GDP and GNP. Much of Irish growth has been due to transfer pricing within multinationals, thus also inflating productivity growth. Greek growth also accelerated in the early 2000s, bolstered by expenditure for the Olympic Games. Spanish growth, finally, has been reasonably high throughout the period.
Fig. 1 GDP Growth Rates
Source: Eurostat
However German growth rates have remained anaemic throughout, with the exception of a minor burst in the second half of the 2000s. Exports have played a significant role in causing this uptick of growth, a development of the first importance for the evolution of the eurozone. Portuguese and Italian growth has barely diverged from German growth rates since the introduction of the euro.
Unemployment rates are consistent with growth rates (fig. 2), showing convergence toward lower levels in the 2000s compared to the 1990s. This is mostly because Spanish and Irish unemployment rates declined rapidly at the end of the 1990s. Spanish unemployment, however, remained at the high end of the spectrum throughout, and has risen faster than in other countries once the crisis of 2007–9 materialised. Unemployment seems to expand rapidly in Spain at the first sign of economic difficulty. The Greek labour market is probably not very different, bearing in mind that official statistics tend to underestimate unemployment. Greek unemployment rose rapidly in 2009, once the crisis had hit hard. Equally striking, however, have been the high rates of German unemployment throughout this period, if anything exhibiting an upward trend. The same holds for Portugal, which has followed Germany in this respect too.
Fig.2 Unemployment Rates
Source: Eurostat
Inflation rates, on the other hand, present a more complex pattern (fig. 3). Rates converged to a fairly narrow range of 2–4 percent in 2001, at the time of the introduction of the euro. However, in the following three years rates diverged, only to converge again in 2004, this time to a narrower range of 2–3 percent. Inflation targeting by the ECB and the application of a common monetary policy took some time to produce the desired effect. The picture is at most a qualified success for the ECB as inflation rates accelerated again in 2007–8. The most important