Exiting the euro

Should the Greek left argue strongly and first and foremost for Greece to leave the euro as the best way out of its mess?  After all, the Euro leaders, the Troika and the private bondholders are imposing a humiliating and damaging degree of fiscal austerity on the Greek people through the upcoming ‘bailout’ package.  Would it not be better to be free of the ‘imperialist euro’ currency and let Greece stand on its own?

Argentina is often cited as an example of a country that escaped the tyranny of a ‘foreign-imposed’ currency (the US dollar) by ending its currency board, a device that set the amount of Argentine pesos automatically in line with the country’s reserves of dollars.   In the crisis of 2001, the Argentines eventually defaulted on their debt and ended the currency board.  Subsequently, after a deep economic slump., the Argentine capitalist economy recovered and raced ahead.  Thus breaking with the euro and devaluing the Greek currency might offer the same way out.

Argentina’s former central bank governor at the time, Mario Blejer discussed this issue in last week’s Financial Times (URL).  Blejer commented: “Given the grim outlook for Greece, many analysts suggest that it would be better for Greece to exit the euro zone. They often cite Argentina’s exit from its currency board in 2002 as evidence of the benefits that would accrue to Greece if it reintroduced its own currency.  It is true that, following the peso devaluation and after a painful (but short) adjustment period, Argentina enjoyed six years of rapid growth.  But Argentina’s experience was singular. Strong export prices resulted in sustainable external surpluses.  Greece, on the other hand, cannot rely on favourable external conditions and is already in a deep recession.  In practice, moreover, Argentina had no choice after defaulting but to ditch its peg, since the currency board was a unilateral arrangement that did not envisage counterparty support or institutional safety nets. Unlike Argentina, Greece belongs to a formal multilateral arrangement that could provide the intensive care and official finance needed to smooth the adjustment.”

Blejer goes on to state that “an analysis of the costs incurred by Argentina strengthens the case for Greece to remain within the euro zone.”  Once it became clear that Argentina was going to devalue the peso, there was a run on the banks which lasted for over 18 months and used up two-thirds of dollar reserves.  Capital controls had to be imposed, which then made it impossible for businesses to fund their operations.  The government fell.   And remember Argentina had never stopped using its own currency, the peso.  Greece has, so it would have to introduce a new currency to replace the euro.  Who would want to be paid in this currency and who would agree contracts in it?  Blejer concludes:  “in normal circumstances, in order to cut real wages (and this is what central bankers want to do – MR) , devaluing the currency is more palatable than reducing nominal wages.  But when devaluation requires exiting a monetary union, the resulting financial implosion has to be factored in”. 

In other words, a national capitalist economy can try and escape a depression by devaluing its currency to gain competitive advantage in world markets, but it is much harder to do it without major disruption when there is no currency to devalue and it means coming out of a wider currency union.  Blejer did not add that, eventually, devaluation would not work, unless a national capitalist economy can improve competitiveness and raise exports to pay for foreign investment.  Without that, devaluation can only make the foreign debt burden even worse.  Indeed, competitively priced exports will be difficult to achieve if so much capital and raw materials must be imported to make those exports.  And Greece’s import component of exports is high.  Indeed, the experience of five recent devaluations of economies in crisis (including that of Argentina) shows that they lead to a 10-20% fall in real GDP and take five to ten years to recover to previous real GDP levels (http://www.cepr.org/meets/wkcn/1/1621/papers/Rebelo.pdf)  – that’s no picnic.

None of these arguments are put forward to suggest that Greece staying in the euro and accepting so-called ‘internal devaluation’ through wage and pension cuts etc is ‘better’.   It’s just that neither external nor internal devaluation will save Greece from years of depression and a generation of lower living standards for most Greeks (see my points on Latvia in my last post, Greece: a Sisyphean task, 13 February 2012).  Devaluation is not a quick way out.  As Blejer says “what is required is not an abandonment of the euro but a framework adapted to the specific context of the Eurozone and Greece itself”. 

Of course, what Blejer means by a “framework” is lowering wages, privatising the state sector, reducing taxes for the corporate sector (especially big business) and ‘deregulating’ labour markets i.e. the super-exploitation of the Greek people to raise profitability.  But the left could also find an alternative policy to exiting the euro where Greece negotiates a full default on its debt to private and foreign bondholders; takes over the banks; and uses the savings from bond and interest repayments (€17-20bn a year) to start state directed investment in jobs, technology and funding small businesses, while staying in the euro to protect the savings of the people from destruction, keeping down inflation and avoiding a rise in foreign debt.  The question of exiting the euro then becomes an issue for the Euro leaders to impose (and to be resisted by a campaign within Europe), not as the main policy plank of the left.

7 thoughts on “Exiting the euro

  1. Very good. this – not leaving the euro – can also be used as a mean to “democratise” the EU, by forcing the smaller partners to side with Greece, knowing that they might be as well the next victim of deportation.

  2. The workers would have to be the ruling class to do what you’re suggesting, unless you’re suggesting that the more enlightened sectors of the capitalist class are in to having a haircut.

    If the workers were to take, hold and operate the means of production and exchange themselves, why should they bother about staying in the Euro? Why not exit the monetary system and engage in production/consumption on the basis of what’s useful to them?

  3. @Mike B, I don’t think that controlling the banking system and spending money to maintain people’s livelihood requires the working class to take control of the means of production. It’s a survival strategy dictated by a weak capitalist system who cannot be expected to provide employment and salaries to all the working people (and would still depend on capital inflows from the outside).

    Everybody knows that the financial system, in Greece and elsewhere, would already be bankrupt without the money given by governments, and everyone sees that governments are afraid of introducing controls on how banks are using this money. In this situation radical measures to control the banks may become a popular demand, and they may serve the interests of the working class better than leaving the euro, for the reasons detailed in the article.

    A second reason why staying in the euro may serve the interest of the working class is that the attempt to force Greece out of the euro may expose the European rulers to a campaign on a European scale. If Greece opts out voluntarily we will see some pitiful solidarity for the Greek, but the prevailing message will be that working class people must find a solution (i.e., come to terms with poverty) in the framework of their own nations.

    I live in Italy where there is a certain degree of solidarity with Greek people, but it is assumed almost without discussion that Greece should follow Argentina, the implication being that “we” should do the same if the cost of staying in the euro gets too high. I think that in a country like Italy (whose capitalism is much stronger than Greece’s) there can be no common interest between the working class and capitalists (as it may be the case for Greece, not because they are more enlightened but because Greek capitalism is weaker). To me, here in Italy, the idea of leaving the euro put forward by some leftists seems no more than the idea that “we” can live better in a less competitive environment, just printing money and forgetting international capitalism and class struggle. This may even be presented as some sort of socialist perspective. I think there is an urgent need to challenge these views.

  4. Michael,

    I think your position of opposing exit as a demand for the Greek Left is unobjectionable on the immediate economics but problematic on the politics. It is true that there is no automatic economic advantage for workers to having a Greek capitalism outside the euro, but the issue is how the structures of the Eurozone have put greater distance between state/financial structures and pressure from popular resistance, by subordinating decision-making to an imperative that is not bounded by Greece’s national borders.

    Whether or not breaking up the Eurozone is a good or bad idea has to be understood by looking at the whole euro project, its function and effects, not just how it affects this or that peripheral economy.

    Greek capitalism is a junior (and increasingly subservient) partner in an imperialist project that has produced a worsening of inequalities of power and wealth across the whole Eurozone. This great power project is to create a single currency to take on the US dollar within a competitive world system. I think this analysis of EMU as imperialist is Costas Lapavitsas’ key contribution, even if sometimes he incorrectly downplays the logic of the economic argument you’ve put here.

    The Left should be for the break-up of imperialist projects because they create deep problems for the working class struggle in both core and periphery. For the current euro project to continue to be successful in a period of crisis requires disciplining those peripheral parts of the EZ economy that have fallen behind. It also thus creates (real, material) national tensions that can be capitalised on by the hard Right in both core and peripheral countries. I just can’t see how politically the Left has anything to gain from holding on to this project.

    I know there are some on the Left who don’t see EMU as imperialist, but TBH they haven’t made much of a case from what I can see. In fact, they tend to dodge the question (e.g. at the debate at the HM conference).

    Love your blog, however, keep up the terrific work!

    1. These are important concerns, but I am not sure that Greece leaving the euro would cause the euro as an imperialist project to break up. Even if it were the case, I think Michael himself pointed out that sectors of the German bourgeoisie may see the return to the deutsche mark as more suited to their imperialist expansion; thus, an eventual break up of the euro could also result from the adoption of a different imperialist stragegy. The same may also be true of Italy: the choice is not between an imperialist euro and a non imperialist lira, because both strategies can be used by the ruling class against the working class and the rival capitalist classes.
      The main point is that leaving the euro should not be the first and foremost demand of the left. The reason is that it is illusory to think that it will bring economic recovery, while making acceptable the idea that further (presumedly short-term) sacrifices will be required. I think that the most important demands on the part of the working people should be to break the euro discipline with economic measures going to their benefit, here and now. Only then it will make sense to say that the euro can go to hell.

  5. I very much agree with your point that the policy of internal or external devaluation does not respond to the problems arizing out of the present crisis. It is simply a restatement of the neoclassical falacy that the present crisis is the result of a discrepancy in prices.
    Therefore the question of whether Greece should stay or exit the euro should be posed on the basis of the economic policy to be followed.
    It is obvious that any left wing policy should target growth and employment. Which in the context of the present crisis means direct state investment in the economy to cover social needs.
    So we can restate the question : Is such a policy attanable for Greece inside the Euro ?
    My view is no because the EU policies target to a brutal deregulation of the labor market with the view that this will attract investment sometime in the future. Poverty and despair will prevail in the meantime.
    Therefore a plan of productive restructuring which is more than needed for Greece can be implemented only outside the Euro.

    1. I dont think we are far apart on the policy prescription. First, we must get the national economic policy right; then we must campaign Europe-wide for it, because a socialist alternative will be in severe difficulty if Greece has to go it alone. You may be right that such a policy for Greece may mean its expulsion from the euro. But it is best to show Greeks and other workers in Europe that a socialist policy aims for unity in Europe and does not start from nationalism or beggar-thy-neighbour policies. That will bring more support for the alternative than just saying leave the euro and all will be well.

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