In response to the on-going euro crisis, the German left is now discussing the option of a “controlled withdrawal” by individual countries, particularly Greece, and the return to national currencies as a possible solution, both for the benefit of the societies most affected by the crisis, but also in order to prevent the uncontrolled collapse of the Eurozone. Representative of this position is Oskar Lafontaine, who calls for a return to the European Monetary System, and the two authors Heiner Flassbeck and Costas Lapavitsas, who recently submitted a study on behalf of the Rosa Luxemburg Stiftung on the causes of the euro crisis and possible strategies for overcoming them. With this study and through further analysis, the Stiftung aims to contribute to an important but controversial debate. In the following, the position will be taken that advocating an exit not only arouses false hopes, but also creates wrong oppositions. Not only is the risk (too) large that an exit from the EURO by countries such as Greece or Portugal will result in the worsening of their current problems; from a left-wing perspective there is a much greater need to promote solidarity in a process of re-foundation of Europe.
“The EURO – but not like that” was once a PDS (the former German Party for Democratic Socialism, ancestor of Die LINKE) campaign slogan. During the late 1990s, the left put forward a relevant critique of the form of monetary union that was finally enshrined in the Maastricht Treaty and the Stability Pact. Its monetarist form only considered debt, borrowing and inflation, but not current accounts, developments in productivity, nor levels of social benefits and wages. As a result, the different levels of productivity of individual member states and regions in the European Monetary Union (EMU) could not be offset by exchange rate adjustments. At the same time, the harmonisation of minimum social standards and current accounts as well as a kind of financial adjustment mechanism for member states (beyond regional and conversion funds) were lacking. This meant that the only possible compensatory mechanisms that remained were wages and wage scale policy as well as further reductions of welfare standards in the countries with current account deficits.
A critical culmination of the growing imbalances in the euro area was delayed by a credit glut. This worked as long as loans were easy to get – due to low interest rates and abundant liquidity – and government bonds easy to sell (not least to major German banks). The immense export of capital on the part of surplus countries guaranteed a steady flow of refinancing. The long-term debt-financed demand from consumers from deficit countries, as well as these countries’ businesses and governments, provided the main foundation of the export boom and thus modest growth in Germany. It was not until the crisis, and especially with the programme of cuts imposed by the Troika, that national debts rose sharply. At the same time, the Troika pushed through so-called internal devaluation, supposedly in order to restore the competitiveness of the ‘crisis countries’. In actual fact, these rigid austerity measures pushed all of Europe into recession and plunged ‘crisis countries’ into a depression. The result is a spiral of misery running from Greece to Spain and Portugal.
Heiner Flassbeck and Costas Lapavitsas show in a highly current study entitled The systemic crisis of the euro, prepared on behalf of the Rosa Luxemburg Stiftung, how the potential benefits of the EMU have been gambled away. They insistently call for the “last chance” for radical political change to be used: “A new strategy would need to include the following crucial elements: a reduction of the gap in competitiveness, particularly by increasing wages in Germany; an immediate end to fiscal austerity; and providing European Central Bank (ECB) credit, Eurobonds or largely unconditional support through the European Stability Mechanism to bridge the difficult transition period for debtor countries. Yet even these solutions would need time: it would take at least ten years for the debtor countries to return to a situation in which they are economically self-reliant, and able to generate growth and jobs.”
Since the probability of such a fundamental turning point actually occurring is not very high, other options must also be envisaged. In the face of a situation in which some countries can hardly bear the political and social costs of adjustment and where democracy is seriously threatened, the authors recommend openly considering the possibility of an “orderly exit” from monetary union. But what is an “orderly exit”, and what would be its likely consequences? In the following, the various exit scenarios will first be outlined, then the risks associated with the exit of the so-called crisis countries – both for their population and economic development, but also for Germany and the other euro countries – will be demonstrated. Finally, the question will be posed as to the stance of the various left-wing positions on the idea of a European project with respect to the euro crisis.
William Tabb, the critical US economist, makes the point: “Greece is not the problem, but Germany. The EU should take that country out of the euro.”2 What here is intended as an ironic twist, based on the analysis of real causes, is meant seriously by the former president of the Federation of German Industries (BDI), Hans-Olaf Henkel: “There is an alternative to the ‘no alternative’ euro policy: the collective exit of Germany, Holland, Austria and Finland”, he proclaimed early on in interviews.3 Increasingly, the heated debate tends towards a demand for the complete dissolution of the European Monetary Union, most recently represented with broad media coverage of the newly established party ‘Alternative for Germany’. Initially a Greek exit from the EMU was demanded particularly by conservative neoliberals, including prominent figures such as Hans-Werner Sinn, Hans-Olaf Henkel, Thilo Sarrazin and Frank Schäffler, a representative of the Euro-sceptics within the FDP. The influential media figures in Germany advocating a ‘Grexit’ provide the federal government strong reasons for setting out their own position: the euro as the core of the European Economic Community must be defended at all costs, Greece should remain in the euro and further assistance can only be provided in exchange for even harsher austerity measures and intrusion in its sovereignty. The German government thereby presents itself as a voice of reason located in the political centre.
The left has long practised restraint regarding the exit option. In leftist circles there has been little public discussion about exit strategies so far, and if they have occurred, then rather in the ‘crisis countries’, especially in Greece and Portugal, where, under the enormous pressure of austerity dictates, every possible way out of the current untenable situation must be considered. However, it is rather the old communist parties such as the Greek KKE (Kommounistikó Kómma Elládas) or Portuguese PCP (Partido Comunista Português) that are seriously considering an exit. On the other hand, the two more recently established left-socialist parties in both countries, SYRIZA and Bloco de Esquerda, argue for new negotiations with the Troika and a debt moratorium, but want to stay in the Eurozone. Oskar Lafontaine has triggered a debate among the German left that previously occurred only sporadically. He considers dissolution of the monetary union necessary: “If real appreciation and devaluation are not possible, then we will have to give up the single currency”, he explains on his website. The EURO should be replaced through a return to national currencies. Their exchange rates should be defined by the EU in order to prevent speculation. Lafontaine proposes that the European Central Bank should take on the role of protecting southern European countries against an overly harsh crash of their currency by intervening in different ways.
Whether for or against an exit – most on the left agree about the problem and hold similar causes responsible for the current crisis. However, they draw very different conclusions. Heiner Flassbeck, former chief economist at the United Nations Conference on Trade and Development, sees the core problem of EMU – like most politicians in Die LINKE – as the divergent trade and current account balances that have developed under very different economic conditions. At the same time, the Federal Republic has long “systematically lived below its means”.4 To save the euro, in his view, nominal wages will have to increase more in Germany than in the rest of the Eurozone. According to his calculations, “if wages are increased from now by 4.5 per cent each year, by 2022 there will be a balance of price competitiveness”.5 In order to bridge this long period, “Eurobonds or bailouts, as well as consistent ECB intervention are sensible measures”.6 However, Flassbeck is sceptical about whether German trade unions will be able to enforce permanently higher wages. He draws the conclusion: if the “competitivity gap” is not closed, then the Eurozone will break up.7 Before this disintegration process awakens “old resentment” and produces “new hostilities”, he calls for Europeans to “separate yourselves”.8 He first proposes a separation between the northern and southern EURO. The southern Eurozone would be led by France and also composed of Greece, Italy, Spain and Portugal. The southern EURO could immediately be devalued by about 40 per cent, which would suddenly restore the competitiveness of this large southern market. The northern Eurozone, under German leadership, would include countries such as Austria, the Netherlands, Finland and maybe later the UK. This perspective has been discussed and adopted reluctantly among the southern European left – recently by the likes of Mimmo Procaro, one of the most important intellectuals of the former Italian party Rifondazione Communista.9
Without fundamental changes, however, the EURO will not last long – that is the urgent warning in the study The systemic crisis of the euro by Flassbeck and his co-author, Costas Lapavitsas, a Greek economist who teaches in the UK. This is also the opinion of Gary Cohn, president of Goldman Sachs; and the star economist Nouriel Roubini.10 Therefore, Flassbeck and Lapavitsas favour an exit option as a last resort to prevent uncontrolled collapse of the Eurozone. If an exit takes place in an orderly manner – in the case of Greece, with an agreed haircut on debt and long-term guaranteed financial assistance, as well as a devaluation of the currency by up to 50 per cent – it is conceivable. The costs would remain within limits, and Greece would have a chance for an end to its “recession martyrdom” (Axel Troost).
Here, for Flassbeck and Lapavitsas, two conditions are crucial: “First, strict controls on the movement of capital would be essential if capital flight and a bank run were to be avoided in the case that exit was being considered in one or more countries at the same time. Cypress provides a precedent: on the one hand it demonstrates that exiting EMU can be brought in line with European treaties and agreements; but it also proves that controls can be put in place quickly enough to prevent chaos from developing after it has become clear that an exit is being considered. Second, during the transition to a new national currency there is a risk that leaving a currency’s value to the market might lead the currency to collapse,which would make transition a very painful and expensive process.11 In order to avoid excessive devaluation, the authors propose the revival of the European Monetary System (EMS)12 (as does Lafontaine). This would enable controlled appreciation and devaluation of individual national currencies according to negotiated target corridors and coordinated action by the central banks. Such a scenario is comprehensible, but there are serious dangers in its implementation and justifiable doubts as to the actual feasibility of the proposed strategy.
What would an exit from the EURO mean for Greece?
Increased cost of imports: With capital controls and the reintroduction of the EMS, Flassbeck and Lapavitsas suggest two mechanisms for avoiding “excessive” currency devaluation. However, they expect a devaluation of up to 50 per cent to be necessary. That would mean all imported products would suddenly be twice as expensive. This would not only affect more or less expendable consumer goods, but also goods urgently needed for the survival of production such as machinery, industrial upstream products, raw materials and energy. Perhaps worse still would be the increase in the price of essential goods such as medicines and food. Health care in Greece has already almost collapsed. Medication must be paid for in advance by patients because pharmacies no longer receive payment from the bankrupt health insurers and have stopped supplying clinics and hospitals. Hunger has also returned. Although traditionally agriculture has been an important sector in Greece, even before the crisis the country was running trade deficits in the food sector. Devaluation would thus further worsen the country’s problems in production and reproduction.
Missing export base: According to the plan, currency devaluation should abruptly restore the competitiveness of the Greek economy and spur exports. But after years of deindustrialisation, it remains open what would actually be produced and exported. Axel Troost points out that because of the “dramatic depletion of Greek economic structure and infrastructure”, it is by no means certain that a currency devaluation “would rapidly improve through export surpluses”, even if the European Union were to “contribute support for a restart through the European Development Bank”.13 Devaluation may lower inherent price disadvantages, but that alone is not sufficient. The Greek export industry was already suffering before the onset of the crisis, not only with high (unit labour) costs in comparison with other countries, but also lagged behind in terms of quality and innovation. And it is massively dependent on imports of efficient machines and high-quality semi-finished products, which – as described above – would be significantly more expensive and thus drive up the cost of production in the country. These qualitative deficiencies in the Greek economy would not be solved by currency devaluation. Aside from the highly speculative financial and construction sectors, only tourism was booming in Greece before the crisis; but here too, Greece has fallen behind Turkey in terms of quality and price. Even in the agricultural sector, no export boom can be expected: for years the country has had to import more food than it exports.
Following the example of Latin American countries, an extractivist path for development, meaning the even greater exploitation of resources, is being considered to enable a comprehensive state policy of redistribution. In this context, hope is placed especially on suspected oil and gas deposits in the Aegean. This could bring the Greek state a total of around 600 billion dollars (465 billion euros) over 25 years, according to the news agency Reuters.14 This sum exceeds that of the Greek national debt by almost half. Should the assumptions prove correct, the notion of development beyond the Eurozone would certainly have an economic basis. However, a social-ecological strategy would look different indeed. Flassbeck does not rely on exports at all: “a country that is not competitive cannot keep its borders open perpetually. [...] Imports must be replaced by domestic products as far as possible.”15 This perspective is undoubtedly correct, yet how should the transition be organised?
Lack of capital: Whether the reconstruction of a domestic economy based on the needs of the population, restoration of the export sector or the profitable exploitation of resources – all three development models first require billions in investment. This requires capital. After a large haircut on debt, at first it will be extremely difficult for Greece to raise fresh capital at affordable interest rates on the international capital markets. The haircut, however, is necessary; as a return to the Drachma could lead the debt drawn in euros or dollars to suddenly double in value. Then all that remained would be direct financing by European institutions: the European Central Bank could guarantee state funding through Eurobonds or the like, provide structural funding through cohesion funds and others, and the European Investment Bank could push further investment.
Shock transformism: Why should those who have the say in the European Union suddenly distance themselves from their harsh conditions or austerity dictates? How realistic is it that they will agree to a haircut or the direct financing of the Greek state by the ECB? Greece would continue to be dependent on a post-democratic, authoritarian neoliberal bloc. The Lisbon Treaty “with all its restrictive effects on fiscal policy, would continue to apply to these states, the Maastricht criteria must continue to apply,” the basic freedom of capital in the European internal market would continue, and “free competition, which leads to a disadvantage for less productive regions, [would] in no way be repealed”.16 For Greece, nothing would be gained. According to a survey by Prognos, the country should instead adapt to losses in growth of more than 164 billion EUROs up to 2020.17 Which left-wing government could survive such economic collapse and ‘shock transformism’?
What would an exit from the EURO mean for the German economy? Flassbeck and Lapavitsas warn that in an exit scenario, Germany would undoubtedly be hit hard economically.
End of the export model without a suitable transition: According to the Prognos study mentioned above, a Greek exit from the currency union would lead to a decline in growth of around 17.2 trillion euros in the 42 most important economies. Germany alone would have to cope with about 73 billion EUROs in losses by 2020. There would also be write-offs for private and public creditors to the amount of 64 billion EUROs (assuming creditors forego 60 per cent of their claims and the Drachma were to be devalued by about 50 per cent). In addition, the return to the EMS and the Deutschmark or the creation of a northern EURO would result in strong currency appreciation. Since Germany’s share of exports compared to GDP now stands at 50 per cent, the German economy would be thrown back by many years, and millions of jobs would be destroyed. Flassbeck is convinced that “the entire political elite would have to resign and the German banking system would be nationalised”.18 Goldman Sachs has calculated that the new currency would appreciate by 25 per cent in real terms. The bank estimates that the breakup of monetary union would cost Germany about 800 billion euro.19 It would have to absorb a drop of 40 per cent in industrial production; Germany’s export model, according to Flassbeck, would be dead.20 Based purely on calculations (taking into account the impact on interest) “with that money, Germany could afford 94 billion EUROs of transfer payments every year for ten years”.21 It would therefore be cheaper to provide Greece with the necessary financial resources for an economic restart through a real transfer union in the medium term. An abrupt appreciation of the new Deutschmark would result in a lack of time and financial resources for a socio-ecological transformation of the economy, especially of the export industry – there would be no suitable transition period,22 rather a shock strategy as portrayed in Meinhard Miegel’s right-wing conservative post-growth scenario.23
And finally, what would an exit from the euro mean for the Eurozone and the world economy?
Chain reaction and collapse of the monetaryunion: In the case of withdrawal, the Prognos study warns, it is probable that “the capital markets would then withdraw confidence from Portugal, Spain and Italy”, which would “also lead to state bankruptcies there”.24 It would even be impossible for the powerful European Central Bank to get control of this chain reaction through purchases of government bonds on the secondary market and unlimited injections of liquidity for banks. The result would probably be an uncontrolled collapse of monetary union. “The world economy would fall into a deep recession.”25
Consequently, would an “orderly exit” and a return to an old-style European Monetary System be preferable? For a moment, let us put aside the drastic consequences for the countries affected by both devaluation and appreciation. What would be gained? Does the EMS guarantee controlled appreciation and devaluation of individual currencies? Probably not. Rather, the return to national currencies would reopen the potential for foreign exchange speculation. Just how much power currency speculators have was demonstrated impressively by George Soros in 1993. At that time, his hedge fund speculated against the Deutschmark and pushed the pound out of the European Monetary System.
The enormous imbalances in current accounts could perhaps be reduced, but at the same time, there is the threat of a further bloating of financial markets and an increase in currency speculation. It also remains unclear how the shock of devaluation in Greece, for example, or the shock of appreciation in export economies such as Germany, or even a European or worldwide depression, could be coped with politically. Such a deepening of the crisis would not especially improve the ability of left-wing and emancipatory forces to organise, but would increase the risk of shifts towards right-wing authoritarianism and neo-fascism.
No acting subject:Flassbeck and Lapavitsas justify their call for an “orderly exit” with the argument that other options are politically blocked, because there is no acceptance among those in power – and in Germany in particular, which is viewed as the key country. The question then arises as to who should organise an “orderly exit”? Flassbeck and Lapavitsas, in my view, underestimate the determination of those in political power, as well as the capital factions supporting them, to defend the EURO at all costs – because of the economic and political risks and consequences enumerated here.26 Can those in government and the Troika seriously be expected to grant favourable conditions and substantial aid for an exit from the Eurozone for Greece or other countries when they currently refuse to do so with such rigidity? Is it conceivable that they might agree to a comprehensive haircut or Eurobonds and simply loosen the pressure for tough austerity measures and fiscal discipline? Probably not. The ruling classes give nothing away for free: there is no exit through the gift shop. Pushing through an orderly exit based on solidarity or a return to the European Monetary System is no less illusory than putting forth further demands for a social Europe – only much riskier. There is no acting subject in this sense.
Unlike Flassbeck and Lapavitsas, Greek advocates of secession such as Panagiotis Sotiris do not believe in an orderly exit from the Eurozone: the debate takes place in Greece in the context of the possibility of a “real left-wing government”. Such a government, which must be based on a broad coalition of popular forces would be, so the assessment, unlikely to be provided with the necessary support for an economic restart by the European Union, but instead would be contested. “It is impossible to bring about such profound changes through simple decisions and decision-making processes within the EU. They must come in the form of a break.”27 This would involve “an immediate cessation of debt service; the nationalisation of banks and strategic infrastructure” and the re-introduction of capital controls and other regulations.28 As such, an exit is also considered a possibility of developing international relations that are “based on mutual benefit”.29 This means economic relations with the countries of the Arab Spring, but also with China, Latin America, Turkey; and other countries in southern Europe that could also have an interest in leaving the Eurozone. The hope is that “Leaving the Eurozone will not lead to isolation, but opens the only path to a wider range of possible forms of international and economic relations”.30
But here the question arises whether this would relax the grip of the financial markets and the prevailing powers in Europe. In addition, it must be asked what benefits are found in the position held compared, for example, to the position of SYRIZA, the coalition of the radical left. In order to force renegotiation, SYRIZA demands the immediate cessation of debt service, the nationalisation of banks and strategic infrastructure and the reintroduction of capital controls and other regulations, but with the intent to remain in the EURO and to avoid the risk of exit. But behind the question of whether to exit hides yet another question: what is the left’s stance towards the European project?
For decades, the attitude of the European left to the European integration process has been ambivalent. Aptly, the policies of liberalisation and deregulation have been criticised, as have the monetarist currency union, the Maastricht Treaty, the Stability Pact and the competitive orientation of the Lisbon treaties. In the tradition of internationalism, however, the left has adhered firmly to a pro-European stance, drafted proposals for reform and opposed nationalism and right-wing protectionism (for example, as directed against immigrants and ‘foreign’ workers). Given the unfavourable development of the social relations of power in Europe, such pro-European positions always bring with them the risk of being perceived as naive and idealistic, such as when Jürgen Habermas counterfactually celebrates the blessings of the cosmopolitan new beginnings associated with the European Union without mentioning the real social and economic dislocation.31 Conversely, positions critical of the EU in the public debate are generally associated with right-wing nationalist views and slandered, or unintentionally support such positions. Theoretically, a left-wing pro-European perspective and a position that is against the erosion of social rights at the national level is quite capable of being conveyed. Practically however, left-wing perspectives have continuously been brought into a false opposition by real politics, for example, through further supporting a progressive European social model although Mario Draghi has just announced its end, 32 or when regressively focusing on the defence of social rights at the national level. With the crisis in Europe, the European left is struggling to provide an adequate and compelling strategic position. So far this has not been achieved, with a few exceptions, such as in Greece.
Both positions are rational: in the face of progressive Europeanization and transnational power structures, outdated political action confined to the framework of the nation-state is not even an adequate means of defending central social and political achievements. But the “left has not yet succeeded in formulating their vote for a different Europe in a concise and shared idea and policy” for Europe.33
There is growing unease over Europe, even within Die LINKE; this unease is not based on hollow nationalism, but on experience. Over recent decades, every step towards European integration was a step towards the progressive implementation of neoliberal principles, even if there has indeed been progress in some areas. Not least, for many people in Eastern Europe or in Turkey the prospect of membership of the European Union has remained tied to the hope that this would guarantee a greater respect for civil and human rights. At the same time, however, the European Union increasingly resembles an undemocratic and business-oriented lobbying organisation, which beyond the weak European Parliament is hardly subject to political control or influence by civil society and parliaments. Countless measures and programmes of liberalisation, deregulation and privatisation have been pushed through at the European level, even against national interests. European institutions are therefore a “no better environment for engagement than a country’s own social structures and political entities”, according to Panagiotis Sotiris. 34 Particularly in view of the situation in Greece, an attitude has emerged that seeks to ensure that “the importance of the democratic and internationalist traditions of the labour movement and the European left” are not forgotten, but in the end concludes that they have “nothing to do with the reality of the actual institutional framework of the EU”.35
In the current crisis, it becomes all the more urgent to promote consistent steps toward reforming the European Union in order to prevent its breakup. However, the current relations of power does not permit this. Development is rather moving in the opposite direction, namely towards an authoritarian and post-democratic neoliberalism. Thus, Axel Troost and Sahra Wagenknecht demand that: “further transfers of competence to the European level in the field of economic, financial and social policies should take place only if they prevent labour, social and tax dumping.”36
The question of an exit from the EMU or utopian harmonisation of a European social model is in the end, the wrong question. An exit from the EMU – even if there were a chance for economic reconstruction with a country’s own devalued currency – would definitely come with economic and political consequences, the extent of which can hardly be overestimated. It would also probably lead to a chain reaction in other states and possibly to the collapse of not only the European Monetary Union, but the European Union as a whole, with equally disastrous consequences for people in Germany and elsewhere. Strategically, with an exit, Greece would also give away its most powerful argument for negotiations: the threat of a default. This is the dead pledge of a possible left-wing government under SYRIZA – not an exit from the Eurozone, but comprehensive renegotiation of the terms of remaining a member. There is nothing to be said against, wherever possible, enforcing “good unilateral measures” (for example, capital controls or tax reform) and not to wait “until a ‘good’ Europe has been created”, as proposed by Michel Husson. “It is even worth the political risk accompanied by a breach of EU directives” – that need not mean an exit. Other countries may follow. Then there would be the chance to expand reforms within Europe that had begun in one or several countries to others. 37
In contrast, the policy of Angela Merkel’s government divides Europe – this is the greatest threat to Europe, according to Katja Kipping, one of two co-chairs of Die LINKE. 38 The party’s clear rejection of neoliberal crisis management is consistent and is met predominately with favour among the voter base. It has been particularly important to repeatedly combine an emphasis on the causes of the crisis with a perspective of solidarity with the crisis victims and countries, thereby taking a class position, rather than to be split by a nationalist interpretation – for example, that there is confrontation between crisis countries and ‘German taxpayers’. So what needs to be done to prevent further misery and to build a more democratic and social Europe? The party, along with other initiatives and NGOs, has developed numerous proposals in recent years39 and included them in its election manifestos.40 Now, the focus must be placed on presenting the many forward-looking proposals for handling the euro crisis and the social construction of Europe more clearly as elements that form part of a solidary-based process of European re-foundation. There is no risk of confusion with the right-wing party ‘Alternative for Germany’: Bernd Riexinger, co-chair of the Die LINKE, recently explained via Twitter that ‘Alternative for Germany’ and Die LINKE are worlds apart. Whereas Die LINKE say “no to austerity and yes to the EURO”, ‘Alternative for Germany’ says “no to the EURO and yes to austerity”. European integration must not be allowed to continue as a project for domination – Europe must be re-constituted!
Mario Candeias is senior research fellow for the critique of capitalism and social analysis, and co-director of the Institute for Critical Social Analysis (IfG) in the Rosa Luxemburg Stiftung.