The Greek disaster and the future of the EMU Costas Lapavitsas SOAS/RMF November 2015 What kind of crisis in the Eurozone? Not a public debt crisis Spain, Portugal, Italy A crisis of competitiveness and balance of payments surpluses A part of the global crisis of 2007-9 The mechanism of crisis Loss of competitiveness Current account imbalances Capital flows from core to periphery Domestic financial expansion Public and private debt accumulation Nominal Unit Labour Costs (AMECO) 190 180 170 160 150 140 130 120 110 100 90 Germany Ireland Greece Spain 2011 2009 2007 2005 2003 2001 1999 1997 1995 Portugal Policy response Germany clung to the Euro and hardened its mechanisms Liquidity to protect the banks - ECB Permanent austerity – “six-pack”, “two-pack” No significant debt restructuring ‘Reforms’ for competitiveness There is no ‘good euro’ No Eurobonds Joint and several responsibility is impossible to include in the euro-mechanisms No regular ECB financing of state borrowing Outcomes Eurozone in long-term crisis – high unemployment, low growth Crisis moves to the core – Italy and France Periphery mired in stagnation Enormous political and social tensions EMU not viable Investment in the OECD Greek economic and social disaster 25% fall in GDP 2010-15, U/E at 26%, contraction of industrial output by 35% since 2008. Incalculable social consequences Poverty, primary medical care, homelessness, emigration of the young Entrenched social instability Greek political disaster: Syriza Complete failure of the ‘good euro’ approach Full acceptance of EMU policies. Loss of sovereignty Long-term economic stagnation. Loss of national control over banks Political betrayal and disillusionment An alternative strategy Debt restructuring and write-off Lifting of austerity – no surpluses, no balanced budgets, redistribution Nationalise banks and establish development banking Relieving social crisis and restoring labour condition Medium-term restructuring of the productive sector Deep reform of the state Exit from EMU Impossible to adopt such strategy in the EMU Exit to give command over fiscal and monetary policy. No exit from EU Break out of the trap of the euro Recover competitiveness Restructure the economy Modalities of exit Capital and banking controls Rapid printing of banknotes and use of stamped existing banknotes Bad bank to deal with bank balance sheet Devaluation and policies to supply energy, food and medicine For Europe as a whole Dismantle the EMU. Return to monetary and fiscal sovereignty. No austerity. Redistribution Management of exchange rates – no free market Bank restructuring Industrial policy to boost investment Rethinking of EU on a looser basis.