Crisis in the Eurozone by Costas Lapavitsas

The eurozone crisis does not dominate the headlines anymore, in part because the flames that almost extinguished the currency in the summer of 2015 have been subdued. But the fundamental structural weaknesses of the euro have not been addressed; below the superficial appearance of calm, the embers are still glowing, waiting to ignite another explosion. Many events could potentially spark it: a radical government winning office, or the inability of one of the highly indebted countries to meet a debt payment or to comply with the dictates of Europe’s creditors. At that moment, we can expect another drama replete with high tension, blunder blustering, political posturing, soaring apocalyptic rhetoric, and ending with the capitulation of one of the parties, most likely the weaker one.

            But it does not have to be this way. Weaker countries like Greece have other options, as highlighted in the excellent book I will review here, Crisis in the Eurozone by Costas Lapavitsas. He shows convincingly that the apocalyptic scenario depicted in the media every time a crisis occurs—namely, that the alternative to submitting to creditors’ demands is expulsion from the euro, impoverishing many and leading to another global financial crisis—is exaggerated. The character of these narratives derives from the well-known aphorism that, for the media, if it bleeds, it leads. Adapted here, it means that the media’s interest in maximizing viewership creates a perverse incentive to exaggerate and dramatize the implications of exiting the currency union. Another reason is that much of the media relies on the research reports carried out by banks, because they provide a veneer of objectivity. But these reports can hardly be considered unbiased given that banks have been one of the main beneficiaries of the euro, and hence its dissolution would mean major losses for them and their shareholders.

            Enter Crisis in the Eurozone, which helps the reader to see through much of the media-induced fog that surrounds discussion of the euro. Using a treasure trove of data, the book persuasively shows that the euro did not benefit the average person, especially in Southern Europe. Rather, it represented a move towards the financialization of the economy, which refers to reductions in manufacturing and increases in debt-fueled speculative activity which have mostly benefited banks. Furthermore, although the euro was supposed to create convergence between Europe’s strong and weak economies (I document these elite-created expectations in my book Eurozone Politics published by Routledge), it has in fact consolidated and even accentuated the hierarchical structure at the heart of the euro which divides countries into “core” or “periphery”. Lastly, and perhaps the most valuable and interesting part of the book, is his analysis of the fetishism of the euro. This refers to the symbolic meanings that are projected onto the currency that are either loosely connected, or even entirely divorced, from its substantive and concrete elements. This is another feature of the euro that I extensively document in my book, and it is remarkable that Lapavitsas and I independently arrived at similar conclusions on how the euro was fetishized.

He does not fetishize the euro

Banking on the Euro

The goal of establishing a monetary union was consolidated after the signing of the Maastricht Treaty in 1991. There were two major and related pressures that led to it: the re-unification of Germany, which created the spectre of renewed German hegemony, and the belief that the unification of Europe was the best way to prevent a recrudescence of the destructive nationalisms that decimated the continent in the past. But European elites did not have the legitimacy to create a political union, because only a small portion of Europeans—mainly highly educated and mobile cosmopolitan elites—subscribed to an overarching European identity that trumped national loyalties. To circumvent this, Eurocrats decided to unify the currency first, which, it was hoped, would create the pressures that would lead to a real political union.

            Thus right from the get-go, the currency was spurred by fear of Germany, the designs of unrepresentative European elites, and the meretricious attempt to establish the conditions for political unification through the back door, as it were. These motivations were not based on the theoretical and empirical elements of currency unions, and this detachment from what truly mattered was not a propitious start for such an ambitious project. Luckily for Europhiles, though, reputable economists came to the rescue. Titans of the profession, like Nobel Prize winner Robert Mundel, presented models that showed the high possibility that the euro would propel economic convergence between stronger and weaker European countries. Phew; now, this project, largely motivated by the fear of German hegemony, had the backing of eminent economists with sophisticated theoretical models that promised the things that voters wanted.

            Armed with these ideas, Europhiles proceeded to sell the euro to their publics with statements that, with hindsight, are pretty embarrassing: the euro would increase growth by 1% a year, would enhance productivity by similar amounts, augment the amount of time available for leisure, protect against global competition and financial crises, and create a global power with the strength to balance China and the US; these are only some of the promises made to European publics. Of course, it did not turn out this way, especially for countries in the periphery. Where the euro did coincide with growth (especially Ireland, Spain, and Greece) it was mostly debt-fueled speculative activity that came crashing to a halt in 2010, leading to humiliating bailouts and external control. These policies, moreover, transpired mainly to save German and French banks which heavily invested in periphery countries. Italy, meanwhile, has been economically comatose since it adopted the euro, although there have been intermittent signs of life. Even France, which unlike the others is part of the “core”, has mostly seen anemic growth.

The main beneficiary has been Germany, and this is one of the more bitter ironies of the euro. It was supposed to equalize the relative positions of Germany and others. Instead, the distance between them has increased. German dominance has re-emerged even though, being financial and economic, it is much gentler than in previous eras. The rise of radical parties in Europe on the right and the left is partly a response this development. In Italy, France, Greece, Spain, Portugal, and elsewhere, a salient discourse of the populists is that the euro, as it currency operates, has cemented German dominance. This resonates precisely because it contains much that is true. The fact that most Germans probably didn’t ask for or did not seek this state of affairs is immaterial. What matters is that it has had the final say on the conditions of the bailouts that were enacted to save the euro, and through this mechanism Germany has been able to project its model of ordo liberalism onto countries that reject it because they seemingly had little choice to either toe the line or face the consequences of bankruptcy. 

Fetishized Unions

In light of the preceding analysis, one might legitimately ask: why do large portions of Europeans still want to preserve the currency? There are several responses. First, the polls that show that many, in some cases majorities, support the euro are misleading because the pollsters frame the question in terms of simple binaries (support or non-support). A deeper probing would likely reveal that many support the currency only because they fear the alternative, a fear which the media has been happy to fuel. A helpful analogy is marriage. Sometimes, the parties want to stay together because of a genuine romantic attachment, but often times they stay together only because they fear the economic and social consequences of breaking up, especially if there are kids in the picture. The euro is, I would argue, analogous to the second case, which means that it is fundamentally held together by fear. Another reason is that for many, the euro is equated with a European identity that is associated with modernity and progress. This is especially the case in Southern Europe. Countries like Italy, Spain, Portugal, and Greece have looked to Europe to solve their so-called “backwardness”. Like other compelling narratives, this has a grain of truth. In order to enter the European Community, all those countries (except Italy) had to consolidate their democratic structures, protect human rights, and modernize their legal systems. For this and other reasons, belonging to Europe is associated with advancement, and being outside might be associated with backwardness.

            In Crisis in the Eurozone, Costas Lapavitsas reveals how fallacious this thinking is when applied to the common currency. His data shows what most informed observers know: that the adoption of the euro did not enhance the relative positions of the periphery; rather, it led to their relative decline. The currency accentuated Europe’s inter-state hierarchy, and hierarchy, in turn has informed the crisis response which has mostly benefited the banks and their shareholders. Concretely, the bailouts of major banks, and the austerity conditions attached to these loans, were possible because Germany, and to a lesser extent France, had the final say on these crucial decisions.

            Periphery countries are equally responsible because they have been mostly unwilling to challenge this state of affairs. The main reason is that, for the majority of elites in these countries, national worth, dignity, and prestige are tied to belongingness to the euro. One of the valuable contributions of Crisis in the Eurozone is that it encourages the reader to look past these perceptions and focus only the facts. In this regard, there are three main possibilities: 1) More of the same. If periphery countries follow this path, they will precariously remain members of a currency union that has reduced their competitiveness, which is fundamentally held together by fear of the alternative, that is dominated by Germany, and that, for the foreseeable future, will seemingly remain on the precipice of another crisis. 2) Creditor-led default. In this scenario, eurozone countries will publicly admit what they already privately know: the debts of many periphery countries are not sustainable and need to be restructured. Subsequently, default on public debts—still anathema in the euro and illegal according to the Treaty of Maastricht—would be allowed, but on terms dictated by creditors, which would likely mean more austerity. This seems to be the path that Greece is on at the moment. 3) Debtor-led default. The main difference with number 2 is that debt-restructuring will happen on the terms of periphery countries rather than the core, meaning that they will declare non-payment and reject the austerity conditions demanded by creditors. This would likely mean ejection from the euro, but Lapavitsas shows that, compared to the alternatives, it is the least-bad option. Only after the present structure dissolves, he shows, can a new vision of Europe emerge that is not orientated around the interests of finance and core countries.

            The main obstacle to an actualization of a debtor-led default is the fetishization of the currency. As long as the currency is associated, incorrectly, with enhanced relative status and prestige, elites in periphery countries will be unwilling to challenge the core. This suggests that constructive policy will depend on a new definition of self-worth that injects confidence and value in the national community independently of Europe. Not in a way that devalues the EU, since identities do not need to be zero-sum. Again, the analogy of romance is helpful. Relationships characterized by dependency, insecurity, low self-worth, and fear are usually not healthy. Rather, they work best when both parties are confident in their value and capabilities independently of the other. Analogously, periphery countries will be better able to confront the unhelpful policies of the core only if they alter their perceptions of national worth. Easier said than done, of course. It is hard enough for individuals to alter their perceptions, and probably even harder at the level of the national community. This suggests that the fetishization of the euro will continue, and elites in periphery countries will continue to view the currency through rose-tinted glasses even when their interests suggest alternatives would be better. The abusive relationship between creditors and debtors will continue until one of the parties says “enough” and decides to break-up. Acrimony and bitterness might ensue, but will eventually pass and open up possibilities for something new.