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PREFACE

The storm buffeting the common currency of Europe is an integral part of the great crisis that commenced in 2007. Barely five years after bank speculation in the US real estate market had caused international money markets to freeze, three peripheral countries of the eurozone were in receipt of bailout programmes, Greece was on the brink of exiting the monetary union, and the mechanisms of the euro faced breaking pressure.

The causal chain linking US financial market turmoil to European Monetary Union instability has been analysed by several economists, including those authoring the present book. Summarily put, the collapse of Lehman Brothers in 2008 led to a major financial crisis that ushered in a global recession; the result was rising fiscal deficits for several leading countries of the world economy. For countries in the eurozone periphery, already deeply indebted after years of weakening competitiveness relative to the eurozone core, fiscal deficits led to restricted access to international bond markets. Peripheral states were threatened with insolvency, posing a risk to the European banks that were among the major lenders to the periphery. To rescue the banks, the eurozone had to bail out peripheral states. But bailouts were accompanied by austerity that induced deep recessions and rendered it hard to remain in the monetary union, particularly for Greece.

The threat to the euro would perhaps have been understood earlier had more attention been paid to history. In 1929 speculation in the New York Stock Exchange induced a crash that led to global recession; by 1932 it had become necessary to abandon the gold standard that had only been reintroduced in 1926. The recessionary forces in the world economy had grown vast in part because states had been trying to protect gold reserves and associated fixed exchange rates. It became impossible to cling on to the rigid system of metallic world money.

The European Monetary Union, needless to say, is quite different from the gold standard. It is a system of managed money that is free from the blind and automatic functioning of gold in the world market. At the very least, member states do not need large reserves of euros, in contrast to the pressure to hold gold reserves under the gold standard. But it is similar to the gold standard inasmuch as it fixes exchange rates, demands fiscal conservatism, and requires flexibility in labour markets. And, insofar as it imposes a common monetary policy across all member states, it is even more rigid.

The ruling strata of Europe have been determined to create a form of money capable of competing against the dollar in the world market, and thereby furthering the interests of large European banks and enterprises. Governments have not desisted even when the mechanisms of the euro have grossly magnified the recessionary forces present in the European economy. The burden has been passed onto the working people of Europe in the form of reduced wages and pensions, higher unemployment, unravelling of the welfare state, deregulation and privatisation.

To force the costs of defending the common currency onto working people, leading European governments have spared no warning of the dire consequences that would follow the dismantling of monetary union. In this endeavour, they have received support from the research departments of banks as well as from academics willing to paint apocalyptic pictures of life after the euro. In this regard too, the European Monetary Union is similar to the gold standard. Public discourse in the late nineteenth and early twentieth century recoiled in horror at the suggestion of its abandonment.

The gold standard was, of course, abandoned without the world coming to an end. International monetary unions, moreover, tend to have a limited life span, even when constructed with the most solemn pledges. Regardless of what politicians and journalists may say, the European Monetary Union is untenable in its current form. As the inherent tensions come to a head, the countries of Europe will be forced to devise new monetary arrangements for their domestic and international transactions.

The inculcation of fear has been made easier by the domination of Europeanism among the intellectual and political forces that could have offered an alternative narrative. For more than two decades, the notion that the euro is the epitome of European unity has grown in influence among the politicians and the opinion makers of Europe. Even more strikingly, a form of money that aims at serving the interests of big banks and big business has been presented as an inherently social-democratic project.

The belief that the monetary union represents social progress that could truly benefit working people through judicious institutional intervention has commanded support in unexpected quarters. Thus, vocal supporters of the euro have come from the Keynesian tradition, even though the latter has historically rejected rigid international monetary arrangements. Astoundingly, support for the euro has also come from sections of the European Left, including its furthest reaches. Who would have imagined that putative heirs of Karl Marx would be transmogrified into defenders of a variant of the gold standard?

Support for the monetary union from the European Left has decisively affected the political fallout from the crisis. Many have spoken volubly about the iniquities of capitalism, the disastrous nature of neoliberalism, the absurdity of austerity, the poison of inequality, and so on, and so forth. But whenever the discussion has turned to the euro, which has, after all, been the focal point of the crisis, much of the Left has sought simply to change the subject. Or it has put forth proposals with impeccable mainstream credentials, including issuing eurobonds and lending by the European Central Bank to member states. In the face of the deepest crisis of European capitalism since the Second World War, the left alternative has often appeared as a reworking of Bagehot’s advice to the British ruling class at the end of the nineteenth century, namely to lend freely and ask questions later. It is no wonder that the Left has been marginal to the politics of the crisis so far.

Analysis in this book treats the euro as integral to the crisis facing the European Union. The theoretical framework is based on the tradition of Marxist political economy, particularly the theory of world money, while drawing extensively on mainstream economics. The aim has been to identify the social and economic causes of the storm that has engulfed the eurozone since late 2009. The most distinctive feature of the work, however, and fully in line with its intellectual underpinnings, is its readiness to discuss abandoning the EMU. Europe currently needs radical ideas to shake it out of the intellectual torpor of neoliberalism as well as to determine a path that would be beneficial to working people. But a radicalism that is not prepared to contemplate quitting the common currency has little to contribute either to public debate, or to political struggle currently taking place in Europe.

The book is a collective effort by members of Research on Money and Finance at the School of Oriental and African Studies in London. Parts of it began to appear in March 2010, taking the form of RMF reports that have been widely read. In two distinctive ways the work could only have been produced at SOAS. First, it draws on the School’s vibrant tradition of Marxist political economy which has always been fully familiar with the methods and arguments of the mainstream as well as open to ideas from heterodox economics. Second, it draws on the School’s even longer tradition of development economics and expertise in analysing IMF interventions in developing countries facing debt and currency crises. For us at SOAS, the likely outcomes of the ‘rescue’ programmes imposed on peripheral Europe were painfully apparent at the outset.

Europe is currently on the cusp of a profound transformation. If the conservative response to the crisis finally prevails, the future looks grim. Financial and industrial interests will impose a settlement condemning working people to stagnant incomes, high unemployment, and weakened welfare provision. Democratic rights will be in doubt and the continent will head toward even faster decline. If, on the other hand, radical forces prevail, the balance could be tilted against capital and in favour of labour. European societies could be rejuvenated economically, ideologically and politically. Soon we shall know.

Costas Lapavitsas

London

March 2012