Debate: What do we think about the euro?

A debate is now taking place about the viability of the euro as a currency. The next issue of Socialist Resistance will have extensive coverage of the economic situation and the left’s response to it. Given the very live nature of the debate in the ruling class we are drawing readers’ attention again to this article by Costas Lapavitsas which we carried a few weeks ago. It is part of the discussion on the European left and a reply to it by Ozlem Onaran can be found here.

1. Crisis and Austerity

The roots of the turmoil in Europe lie in the world crisis that commenced in 2007. Briefly put, the bankruptcy of Lehman Brothers in September 2008 led to a banking crisis, which ushered in a global recession. European economies were hit by collapsing exports and contracting credit. The worst was averted through state intervention, partly to support banks, partly to sustain aggregate demand. But state intervention led to the next and more severe stage of the crisis, that of public debt. And as the public debt crisis got deeper, it threatened to reignite the banking crisis.

It cannot be overemphasised, however, that the specific character and ferocity of the European turmoil are due to the monetary union. The euro has acted as the mediator of the world crisis in Europe. From the perspective of Marxist theory, this is hardly a surprise since the euro is a form of world money and not just a common currency. The euro is designed to act as means of payment and hoarding in the world market or, in the language of mainstream economics, as a reserve currency. It serves the interests of the major states that command it as well as of the large financial and industrial enterprises that deploy it internationally. But, by the same token, the euro has crystallised the tensions and imbalances of European capitalism, acting as the epicentre of crisis. This has been a classic feature of world money since gold played that role and dictated the pace of crises through its hoarding, inflows and  outflows.

The euro is an unusual form of world money created afresh by an alliance of states, with Germany at its core. It contrasts sharply with the dominant form of world money, the dollar, which is a national money catapulted into its world role due to the imperial power of its unitary state and economy. For the euro to be able to act as world money it has been necessary to create institutional machinery suited to an alliance led by Germany, a nation state
considerably weaker than the USA. Three elements have been instrumental to it: first, an independent central bank in full command of monetary policy and presiding over a homogeneous money market for banks; second, fiscal stringency imposed through the Growth and Stability Pact; third, relentless pressure on labour wages and conditions to ensure competitiveness for European capital.

The institutional machinery of the euro has catalysed the crisis in  Europe. Pressure on labour has been most relentless at the core of  the eurozone, resulting in rising competitiveness, primarily for  Germany. The result was an entrenched gap between core and periphery,  reflected in current account surpluses for the former and deficits  for the latter. The gap was bridged by huge capital flows from core  to periphery which took the form mostly of bank loans. 2

In the periphery, furthermore, banks engaged in rapid expansion thus
dding further to debt. By the end of the 2000s, the periphery had  become enormously indebted – domestically and abroad, privately and  publicly. When the world crisis hit Europe, leading to recession and  state intervention, it inevitably turned into a crisis of peripheral  debt in all its dimensions. In turn the debt crisis threatened to  become a banking crisis that could potentially destroy the euro.

The response to the crisis by the European ruling classes – of both  core and periphery – has cast a harsh light on the entire European  ‘project’. Their paramount concern has been to rescue the euro.  To achieve this aim, policy has focused on saving the banks exposed  to peripheral debt. Thus, the ECB has advanced abundant and cheap  liquidity to banks; in contrast, miserly liquidity at high interest  rates was made available to states. At the same time, unprecedented  austerity was imposed on peripheral countries, while welfare  provision was cut and labour conditions were worsened. The costs of  the crisis were thus shifted onto the shoulders of working people as far as possible. By early 2011 the class content of the policy to  rescue the euro had become crystal clear: first, to defend the  interests of financial capital by protecting bondholders and other  lenders, second, to promote the interests of industrial capital by  crushing labour costs.

These policies have been dictated by Germany, the main beneficiary
of the euro. German ascendancy is now stronger than at any time in
the history of the European Union. By the same token, the imperial
interests at the heart of the eurozone have become transparent. If
the current policy to rescue the euro succeeds – and there are
grave doubts that it will – Germany will emerge as the undisputed
master of the eurozone and the dominant force across Europe. The
periphery, meanwhile, will stagnate with high rates of unemployment
and worsening income distribution. Even so, a thin layer of financial
and industrial capital within the periphery will probably continue to
do well.

The crisis has been a momentous event for Europe. It has forced
through rapid social change in favour of capital and against labour.
It has also encouraged geopolitical change, turning the eurozone into
a German backyard. At the same time, it has put paid to the hackneyed
ideas of European partnership and federalism that have provided the
ideological cover of the eurozone. The crisis should have thus
provided an opportunity for the Left to recover its poise putting
forth anti-capitalist proposals to take Europe in a socialist
direction. Unfortunately this has not yet happened. Much of the
continental Left is still in the grip of Europeanism, and is
concerned to develop strategies that have a European rather than a
socialist character. Above all, it is in fear of disrupting the
monetary union. The result has been the absence of effective Left
opposition to the social and imperial transformation currently taking
place in Europe.

2. A ‘good euro’?

The Europeanist Left clings to the notion that the eurozone could be
reformed in the interests of working people, creating a ‘good
euro’. Advocates of the ‘good euro’ can be split into two
currents, both of which are prominent within the newly formed Party
of the European Left but also more broadly across Europe. 3

One current are ardent Europeanists who generally downplay the class
and imperial interests at the heart of monetary union. The other
current are reluctant Europeanists who, despite stressing class
interests, do not fully appreciate the implications of creating a new
world money. Both are terrified of the dangers of nationalism and
isolationism, should the eurozone collapse. The monetary union might
have been ill-conceived, but now that it has become a reality, it
would not be advisable to break out of it. 4

For reluctant Europeanists this position also leads to what might be
called ‘revolutionary Europeanism’, overthrowing capitalism on
the supposedly privileged terrain of European integration. Logically
this should also entail creating a unitary (and revolutionary)
European state, but this demand is not often stated explicitly.

Whether ardent or reluctant, ‘good euro’ proposals demonstrate
considerable convergence. There is, for instance, general agreement
that austerity and liberalisation ought to be resisted, and that
Europe needs major redistribution of income and wealth. There is also
agreement that a coordinated investment policy would be desirable to
raise productivity in the periphery and to restructure the European
economy. These are creditable ideas and much of the Left –
Europeanist or not – would probably concur with them. The trouble is
that they do not deal with the pressing nature of the crisis.

By far the most acute aspect of the crisis is the debt of the
periphery. It has eventually become accepted across the Left that the
burden of debt on several peripheral countries must be lifted for
economies to recover. Beyond this point, however, agreement is hard
to find. Ardent Europeanists, such as those within the Party of the
European Left, tend to favour consensual restructuring of debt (in
effect, creditor-led default) which would lower the level of
peripheral debt without upsetting the mechanisms of the eurozone
unduly. The trouble is that creditor-led default is unlikely
significantly to reduce peripheral debt. Lenders are not generally
known to welcome losses. Reluctant Europeanists, consequently, tend
to favour radical restructuring of debt, often at the initiative of
the borrower. But they propose to write debt off unilaterally while
remaining within the framework of the eurozone, the main powers of
which will have to take the losses. Quite how this will be achieved
has not yet been explained.

Against this background, Europeanists have put forth a variety of
specific proposals regarding debt. Here the ground becomes
treacherous because it leads to the outer reaches of actual
policy-making by the governments of Europe. The proposals have
typically revolved around lending by the ECB and issuing Eurobonds,
aspects of which are already present within the current policies of
the eurozone.

Summarising ruthlessly and across a variety of suggestions, the
general idea appears to be that the ECB should expand its current
practice of purchasing public debt in secondary markets (and lending
against collateral of peripheral public debt.) The ECB should acquire
much of the existing debt of peripheral countries and it should also
finance the fresh borrowing of eurozone states in the future. It is
further suggested that the issuing of Eurobonds – which is already
undertaken by the European Financial Stabilisation Facility to obtain
funds for lending to countries in difficulties – should be expanded
to meet the regular lending needs of eurozone states. 5

Nothing precludes crossbreeding between these suggestions, including
the notion that the ECB should be financing itself by issuing
Eurobonds. Such proposals appear as the analogue of the operations of
Federal Reserve in the USA, and thus as an important step toward
creating fiscal as well as monetary homogeneity within the eurozone.

Unfortunately, there are major problems with these proposals, which
help explain why they have generally been given short shrift by the
eurozone establishment. One problem relates to the losses from bad
peripheral debt. If, for instance, the ECB were to acquire existing
peripheral debt at a deep discount, the capital of banks would have
to be replenished to prevent failure; if debt was acquired at face
value, there would probably be substantial eventual losses for the
ECB which would have to be made good. There is a prevalent confusion
among much of the Left as to what a central bank can do. The ECB
indeed possesses an enormous ability to act as lender of last resort,
i.e., to advance liquidity to banks and states. But lender of last
resort has nothing to do with handling bad debts, i.e. solvency.
Guaranteeing solvency is a matter for the Ministry of Finance which
must mobilise tax income to make good the losses represented by bad
debts. In the context of Europe this means drawing on the tax income
of core countries, and therefore imposing burdens on working people.
The ECB has no power to make good the foolish lending that European
banks indulged in during the 2000s. Recapitalising the banks means
committing tax revenues, a step that would have profound class and
power implications

Furthermore, the suggestion that the ECB should systematically
acquire peripheral debt and, even more, that it should have an open
commitment to finance the future borrowing of eurozone countries
would pose a threat to the euro as world money. If the ECB were, for
instance, to begin financing the regular borrowing of all eurozone
countries, there would be heightened risks of inflation which would
lower the credibility of the euro in world markets. There is no
comparison with the dollar in this respect. The dollar is the
incumbent form of world money that draws on established institutional
and customary mechanisms for its acceptability. The euro is a
competitor that has not yet developed a firm framework of
acceptability for itself in the world market. The German ruling class
is unlikely to accept state borrowing arrangements that might
jeopardise the global acceptability of the euro.

Similar considerations apply to issuing Eurobonds in order to replace
existing peripheral debt. The borrowing difficulties of peripheral
states can certainly be managed through Eurobonds, though this would
be a slower method than the ECB providing liquidity directly. But
confronting the likely losses from bad debts is an entirely different
matter, which requires committing capital from tax income. And that
is without even mentioning the additional cost to core countries from
borrowing at higher interest rates, if they were to issue Eurobonds
jointly with peripheral countries.

Finally, there is a further problem which is often not appreciated.
‘Good euro’ proposals essentially aim at overcoming the
contradiction between fiscal heterogeneity and monetary homogeneity
within the institutional machinery of the eurozone. Presumably, if a
common fiscal space was created across the eurozone, either through
loans by the ECB, or by issuing Eurobonds, the functioning of the
euro would become smoother and crises would be eliminated. But the
problem is that the financial sphere of the eurozone is not nearly as
homogeneous as is often imagined. There is indeed a homogeneous money
market, which regularises the terms of bank borrowing across the
eurozone, but the ownership of banks remains resolutely national.
Similarly, there is no homogeneity in supervising and regulating bank
activities, both of which are largely left to each nation state.

Consequently, if bank solvency became problematic, banks would only
be able to seek recourse to their own state, as happened in Ireland
in 2009-10 and Belgium in 2008-9. There are no European mechanisms to
handle the losses that European banks would inevitably make if
peripheral debt was written off. And nor is there any obvious way in
which German or French workers could be made to accept higher taxes
to rescue, say, Italian banks. Each state would have to deal with the
losses of its national banks. The euro remains a creation of nation
states in this regard, and its implications for workers have a clear
national aspect.

3. A radical left strategy

A radical alternative to the policies currently adopted across the
eurozone should offer a resolution of the crisis that would shift the
balance of social forces toward labour and push Europe in a socialist
direction. For the Left to develop a distinctive position, it would
have to challenge the strategic choices of the rulers of Europe
instead of merely focusing on malfunctioning institutional
arrangements. The first step would be to acknowledge the class and
imperial relations at the heart of the eurozone. Working people in
both core and periphery have no stake in the success of the European
Monetary Union. On the contrary, the attempt to create a world money
that serves the interests of European capital has meant worsening
labour conditions at the core and major crisis in the periphery.

A radical alternative should also recognise that the current policy
of imposing austerity and promoting German ascendancy has a high
probability of failure. The main reason is that austerity leads to
recession which worsens the problem of debt. Even worse, the long
term prognosis for the periphery is for low growth. Greece, Ireland
and Portugal will find it increasingly difficult to service their
public debt and will probably have to restructure, or even default.
The inevitable losses would impact upon core countries, and the sums
are likely to be large. Greece alone, if it is to have decisive
relief, would require a reduction of public debt by perhaps 50%-60%,
approaching 200 bn euro. Should this eventuality materialise,
continued membership of the eurozone would be put on the table,
partly by core countries, and partly by defaulting peripheral
countries themselves. The rickety structures of the eurozone would
then come under even greater pressure. The Left ought to be preparing
for such a turn of events, instead of recoiling from it in horror.

The division between core and periphery implies that a radical left
alternative would necessarily differ across the eurozone. For workers
at the core, particularly Germany, it would be vital to break the
relentless pressure on wages imposed by monetary union. But note that
it is fallacy to think of higher wages as a means of rescuing the
euro on the grounds that they would, presumably, rebalance
competitiveness across the eurozone and boost domestic consumption in
the core. There is no capitalist class that would systematically aim
at raising the wages of its own workers, since it would then be
ruined in competition. If wage restraint was broken in Germany, the
monetary union would become a lot less attractive for the German
ruling class, raising the issue of its own continued euro membership.
After all, Germany has long experience in deploying the Deutschmark
strategically to improve its share of world production and trade.

A radical strategy in core countries ought to include further steps
that could complement the reversal of wage restraint while preparing
for the failure of monetary union. An important element would be
control over the financial system. Tax and other impositions to
rescue banks from their reckless exposure to the eurozone periphery
ought to be resisted. Indeed, the Left ought to be making the case
for bank nationalisation that could act as lever to rebalance core
economies, assuming that the mechanisms of control over banks would
also be changed to reflect broader social interests. Above all, the
weight of the German economy ought to be shifted away from exports
and toward improving domestic consumption, public provision, and
infrastructure. For this, it would be necessary to recapture command
over monetary policy from the ECB and to impose controls on capital

In the periphery, on the other hand, the immediate focus of a
radical alternative must be to confront the burden of public and
private debt. Public debt, in particular, has to be renegotiated with
the aim of writing off its greater part. To this purpose there should
be debtor-led default drawing on grassroots participation. There are
certainly costs to defaulting and unilaterally writing off debt,
including being shut out of financial markets for a period and paying
higher interest rates in the future. But even mainstream literature
points out that – to its surprise – these costs do not seem to be
very substantial. 6

Debtor-led default would be immeasurably strengthened by establishing
independent Audit Commissions on public debt across peripheral
countries. They would facilitate workers’ participation in
confronting the problem of debt, not least by allowing for
independent knowledge of the causes and terms of indebtedness. The
Commissions could make appropriate recommendations for dealing with
debt, including debt that is shown to be illegal, illegitimate,
odious, or simply not sustainable.

Debtor-led default in the periphery would immediately raise the issue
of eurozone membership, given that the lenders are the core
countries. Exit is an important component of a radical Left strategy
that could annul austerity while restructuring economies in the
interests of labour. But changing the monetary standard is a major
shock that would require a broad programme of economic and social
change. The most important concern would be to prevent the monetary
shock from becoming a banking crisis, for then the repercussions on
the economy would be severe. It follows that banks would have to be
placed under public ownership and control, protecting depositors,
avoiding bank runs, and creating a framework to restructure the
economy. Needless to say, it would also be necessary immediately to
impose capital controls.

The new currency would depreciate thus putting added pressure on
banks borrowing abroad, but also removing the shackles from the
productive sector and boosting exports. Regaining command over
monetary policy while defaulting on the debt would also immediately
remove the stranglehold of austerity on the productive sector. On the
other hand, rising import prices would put pressure on workers’
incomes, thus necessitating redistributive measures through tax and
wage policy. Finally, industrial policy would be introduced to
restore productive capacity in the periphery and to create
employment. A concerted effort could then be made to raise the
productivity of labour allowing peripheral countries to improve their
position in the international division of labour. Naturally, such a
dramatic shift in the balance of social forces in favour of labour
would require democratic restructuring of the state improving tax
collection and dealing with corruption.

A radical left strategy for both core and periphery would comprise
transitional measures in the most profound sense of the term. Its
precise character would depend on the social forces that would be
mobilised to support it and on the types of struggle that would
emerge. But the great merit of the strategy is that it could change
the balance of forces against capital, creating better conditions to
resolve issues of distribution, growth and employment. In this
respect, a radical left alternative would create a favourable
environment for socialist change by improving the social and economic
conditions of workers.

There is no need for such a strategy to lead to isolationism and
nationalism provided that the European Left regained a modicum of
confidence in itself and in its historic arsenal of socialist ideas.
Indeed, the danger of a nationalist backlash is likely to become
worse as long as the Left continues to disappoint working people.
‘Good euro’ proposals offer no means of stopping the ruthless
re-assertion of class and imperial interests in the eurozone. A strategy that confidently detached itself from the failing project of monetary union would provide a basis for solidarity among European people. For that, the Left would have to abandon Europeanism, the official ideology that has for long haunted its collective mind.

Costas Lapavitsas is a Marxist economist who has conducted extensive work on the political economy of finance.


  1. Ther are many errors in the article. I want to point out just 2:

    A. “The roots of the turmoil in Europe lie in the world crisis that commenced in 2007. Briefly put, the bankruptcy of Lehman Brothers in September 2008 led to a banking crisis, which ushered in a global recession”.

    This makes no sense. Lehmans’ collapse happened in 2008. Something else happened in 2007. What? We are never told. 2007 was a crisis of capitalism, not banking. Asset prices slumped after there was a slump in investment- because the profit rate declined.

    This is crucial, as all attempts to correct a crisis of the over-mighty banks, including the break-up of the Euro Area, miss the point entirely. This was a crisis of capitalism and addressing it requires a transformation of the system per se, not its forms, such as the European Union.

    Perversely, even where a progressive policy of debt default in the ‘peripheral’ countries (how defined, and why?) is mooted and which would hurt the banks and relieve pressure on EU citizens, the author rejects these by recycling empty threats from the Right,

    B. “Debtor-led default in the periphery would immediately raise the issue of eurozone membership, given that the lenders are the core countries”.

    The emptiness of the threat derives from the fact that Germany has an expansionist economic policy, akin to the mercantile colonialism familiar to Hobson and Lenin. It is ‘winning’ new markets and a new lowly-paid workforce through the geographical expansion of the EU and the single currency area. It cannot afford to let other countries devalue and regain competitive advantage; the threat of expulsion is an idle one. Instead, German, French and, yes British banks, would (along with US hedge funds) simply have to take debt default on the chin.

    But this takes us to another question, not even addressed in the piece, which may be summarised in this way:

    Socialists are always and everywhere in favour raising up the level of productive forces, and one of the ways that is achieved is through economies of scale. Marx, even while advocating Ireland’s separation from English rule also advocated a later economic federation of the two. Socialists are not in favour of the backward break-up of the EU or Euro Area, which only plays into the hands of the xenophobes. Socialists are in favour of the United Socialist States of Europe, or in modern terms, a Socialist EU.

  2. Ahmed Desai wrote:
    “Socialists are always and everywhere in favour raising up the level of productive forces, and one of the ways that is achieved is through economies of scale.”

    We’ve only supported always and everywhere raising the level of productive forces because Marx saw “plenty” as a condition of socialism. Perhaps in the 19thC that meant increasing the PF. Now, it requires a whole series of transformations of the PF, family (along with class relations), to preserve and restore the environment, while improving living conditions for the mass of the world’s people – not an increase.

    On the United Socialist States of Europe: I’m not usually a fan of using what Marx or any other guru said to sustain an argument. However, Marx’s views Ireland actually contradict what you say on the USSE, as he advocates a period of separation as a condition of subsequent unity. This is especially aposite in relation to the EC/eurozone if your analysis of what Germany is doing (expansionist economic policy) is correct (which I doubt).

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