A crisis of the Euro project

Continuing my thoughts from earlier. First up, here's Costas Lapavitsas on the Varoufakis resignation and much else besides:



He clearly sees no prospect of a satisfactory outcome within the Euro. This seems right. It's worth reflecting on the extent to which what Greece is facing is the product of a crisis of the Eurozone as a monetary framework.

The Euro was always a tall order. Orthodox economic theory speaks of optimal currency areas (OCAs): these being regions within which a single currency would be a good idea. OCAs possess a number of features, none of which are obviously features of the Eurozone. A striking example is labour mobility. Here's how it's supposed to do. Suppose there is, as is the way with capitalist economies, a crisis. Suppose, moreover that this impacts disproportionately or exclusively on one member state economy (we have, as the terminology has it, an asymmetric shock). Unemployment increases within this economy. Unemployed workers from this country then, on the assumption of labour mobility, move to higher performing countries within the OCA, reducing the unemployment and preventing wages from soaring in their new homes. This, along with price and wage adjustments, smoothes out the shock and we all live happily ever after.

The assumption that prices and wages will 'adjust' is, as New Keynesians will not be slow to point out, far from unproblematic. But compared to the assumption that labour is mobile within an currency area like the Eurozone, that is nothing. Think about it: the Eurozone covers a large area and is divided by language and culture. I cannot easily look for work as a teacher in Germany if I only speak Portugese. Nor can I, if I am a lawyer trained in France, go and work in the distinct legal system of Italy. This is before we consider such barriers to labour mobility as attachment to loved ones, friends, communities, and the like, not to mention the human desire for stability of life.

So what happens when these adjusting mechanisms - labour mobility and price/ wage flexibility don't kick in after an asymmetric shock? The government of the state subject to the shock increases spending, as it has to fund unemployment benefits and the like to a greater extent, plus maintain its normal spending on the basis of diminished tax receipts. It borrows. The scene is set for a debt crisis - higher interest rates are needed to attract funding for increasingly risky debt (owed by a government in a currency over which it has no ultimate control), this reduces demand further in the beleagured economy. Meanwhile there's a liquidity flow from the down-at-heel economy to more prosperous countries within the zone, further magnifying the disparities within it.

Now, some of this is true of single currency zones with which we're more familiar, such as the UK economy. An economic event - say, one affecting a particular industry - might have a disproportionate impact in a certain region - say, the north-east of England. Workers in the north-east might, quite reasonably, not feel minded to set up their stall in Surrey in response to increased unemployment in Newcastle. Nor might prices and wages adjust. In this case, however, central government spending can act to cushion the shock - transferring, to some extent redistributing, funds within the UK. In particular, the north-east of England does not accumulate a public spending deficit (although, we should note in passing, the story as regards private debt in the region might be quite different) - the cost is born by the UK state as a unit. And there's the difference with the Eurozone: there is no fiscal union, no pan-Eurozone tax and spend mechanism remotely equivalent to that possessed by states like the UK. In this sense the Eurozone is an incomplete monetary union.

In other words, the Eurozone is structurally set up for something like the Greek debt crisis to occur. The bail out of banks in response to the 2008 crisis was the tipping point and the rest, as they say, is history.

The temptation here is to conclude that the Eurozone is bad for some national economies (like Greece) and good for others (like Germany). It is here that the Marxist tradition in economic thinking sounds a note of caution. Behind the front of the national economy, lurk a horde of competing interests. In particular, European capitalism and nation-state capitalisms are divided on the basis of class. Talk about what is good or bad for 'the economy' ignores that what is good for some classes, or groups within classes, may be bad for others. Hence, incidentally, the banality of the slogan 'austerity isn't working' - it's working fine for some people. This matters, in the present context because it goes some way towards explaining what might otherwise seem inexplicable: how so many interests in Greece were keen to secure a 'Yes' vote given that austerity policies by any reasonable indicator - employment, output, wages, even profits - are not helping 'the economy'. If the alternative is a threat to the rights of property, of the capitalist class' medium-term ability to pursue profit without interference, then  it is in the interests of that class to see austerity pursued. Class power trumps even the bottom line.

Class interest also explains some of the persistence in Greece of Europeanism, attachment to the EU and, in particular, the Euro. It is straightforwardly in the interests of a significant section of the capitalist class, represented in the media and other opinion-forming institutions, to support structures that support policies favourable to it and minimise the costs of transactions within key markets.

But it is not simply the Greek capitalist class or its representatives in the political centre-right who buy into Europeanism. The left, including the Syriza leadership, share that commitment. Here, however, the commitment is to Europeanism as a political project. Europe as imagined on the left is a respository of the humane desire for peace on a continent ravaged by two world wars. It is an internationalist project, Greece's membership in which signifies its having put behind it the years of the colonels and having irreversibly made the transition to democracy. Those British leftists who grapple with the difference in attitudes towards the EU in states with thriving new lefts (Syriza, Podemos) - generally pro-EU - and the UK itself, where the left has traditionally been hostile to EU membership, forget the very different histories of the countries. The dictatorships that blighted southern Europe produced by way of reaction a favourable view of the European project.

There is Europe, the economic project. And Europe, the political idea. In Greece the tension between the two is nearing breaking point.

The clock ticks steadily towards midnight

However necessary it is to adopt a sober realism towards the immediate prospects in Greece, yesterday's resounding 'No' vote was an example to the rest of Europe. Uncowed by relentless pressure from creditors and the mainstream media, Greece's electorate sent a clear message that they reject austerity. Whatever happens next, they deserve our admiration and solidarity.

Since the result was declared last night, events have moved at sometimes breathtaking pace (see the Guardian liveblog here for updates.) Yanis Varoufakis resigned, giving as his reason that some Eurogroup participants would prefer his absence from talks. This was not before making his feelings known about the No vote - he wrote of the Troika having been confined to its lair. He has been replaced by Euclid Tsakalotos, not obviously more well disposed towards an austerity-based 'rescue' for the Greek economy than was Varoufakis. Meanwhile, Greek banks remain closed and capital controls in force. There appear to be splits amongst the Eurozone leadership, with Merkel opposed to compromise with the Syriza government, and others better disposed. The ECB, as all this goes on, has increased the haircut required of Greek banks (that is, the difference between the amount loaned to Greek banks and the price of the assets required as collateral for these loans, expressed as a percentage of the collateral price: for example, if I lend you £90 but require a £100 IOU as collateral, then I have imposed a 10% haircut) - a sign that Greece is considered an increasingly risky prospect. One thing is certain: things cannot continue without resolution of some sort for much longer. If nothing else, these are interesting times.

Good commentary, from various left-wing perspectives, includes Michael Roberts here, Alex Douglas here, and the inimitable Paul Mason here.

I'll stop there for the time being. Later on I'll say something about how what is playing out in Greece is a crisis of the Eurozone as an experiment in monetary union, complicated by the political ideology of Europeanism.