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  • Published in Book Reviews

The political, and class, nature of European economic austerity is laid bare in Lapavitsas’ Crisis in the Eurozone, which also reveals why ‘Drop the Debt’ is a crucial demand for our side, argues Neil Faulkner

Costas Lapavitsas et al., Crisis in the Eurozone (Verso 2012), xxii, 343pp.

‘These policies [austerity, liberalisation, and privatisation] have been aimed at protecting the interests of banks and bond-holders by preventing default as well as protecting the interests of industrial capital by changing the balance of power against labour … Predictably, austerity has failed to resolve the crisis and indeed made things worse, since the crisis has not been caused by fiscal profligacy … its roots lie in the loss of competitiveness by the periphery coupled with the enormous expansion of the financial system in the 2000s’ (pp.181-2).

Thus do the authors of this excellent analysis of the Eurozone crisis locate themselves firmly in the Marxist tradition of political economy, a tradition which has insisted, ever since the publication of the first volume of Marx’s Capital in 1867, that all economic pronouncements are inherently reflections of class interests. All policies create winners and losers, so the key question is always: who benefits?

Costas Lapavitsas and his colleagues in the Research on Money and Finance (RMF) group at London University’s School of Oriental and African Studies give consistently clear answers. But they do much more: they take an analytical knife to the smug concoction that is the European Union and lay bare the web of intractable contradictions that are its very essence.


Lapavitsas has emerged as a leading analyst of ‘financialisation’; the growth of finance-capital, the emergence of what some have called ‘the permanent debt economy’, and the appropriation of an increasing proportion of the social surplus by financial corporations. As he explained in his 2009 RMF discussion paper Financialised Capitalism: crisis and financial expropriation, ‘workers have been increasingly drawn into the realm of private finance to meet basic needs, including housing, consumption, education, health, and provision for old age’.

What is being argued here is hugely significant. The proportion of surplus that is taken from workers at the point of consumption (one form or another of ‘interest’) – as opposed to that taken at the point of production (‘profit’) – has risen dramatically. It is happening in two ways. First, workers are making direct payments to financial corporations, either because they are incurring debts to fund consumption, or because they are paying more for services that were once part of the ‘social wage’ but are increasingly privatised and commodified. Mortgages and pensions are the obvious examples. Second, much of the tax paid by workers is simply recycled by the state in the form of payments to finance-capital. The PFI schemes whereby private corporations build state hospitals provide a clear case, since they involve steady payments scheduled to continue for decades and eventually amounting to many times the value of the original investment.

Moreover, since the 2008 financial crash and the onset of the current depression, financialisation, especially in the Eurozone, has taken on a whole new significance. The state, both individual nation-states and the proto Euro-state represented by the EU and the ECB (European Central Bank), have become mechanisms for redistributing wealth on a massive scale from labour to capital in the form of austerity cuts and bank bailouts. It is the detailed analysis of this process, its glaring injustice, and its utter futility that form the core of Lapavitsas’s new book, Crisis in the Eurozone.

Germany’s Euro-domain

The main features of the global economic crisis are familiar enough, though the authors provide succinct summaries of these where necessary. What is less familiar is the way in which the crisis has blown open deep-rooted contradictions within the entire EU setup.

To grasp what is happening, it is necessary to begin with the character of German capitalism. So far from being an economic ‘miracle’, it in fact suffers from low investment, mediocre growth, and declining competitiveness in global terms. It has compensated for this by holding down the wages of German workers, but this has squeezed domestic demand, making German firms highly dependent on exports. The primary markets for German markets are inside the EU. As the authors explain: ‘At the core of the Eurozone, Germany has been marked by low growth, flat investment, stagnant consumption, rising saving, and falling household debt. Germany has not been a dynamic capitalist economy on any score. The only source of dynamism has been exports…’ (p.21).

The EU is shaped by this reality. The Euro is an attempt to create a powerful world currency and to attract finance-capital to Europe – to Germany in particular, with Frankfurt emerging as major global finance hub in recent years. To sustain the Euro, member countries of the Eurozone have had to accept a high fixed exchange-rate. This has redounded to the advantage of Germany at the expensive of less competitive southern European economies. The German ‘core’ of the EU runs a trade surplus by exporting to the countries of the ‘periphery’, which are forced to borrow to pay for imports. The domination of German capitalism is thus hardwired into the EU, with peripheral countries trapped inside a structure which condemns them to deficit and debt.

The Holy Trinity: austerity, liberalisation, and privatisation

But there is more. By continuing to squeeze the wages of German workers, German capitalists gain further competitive advantage and pile additional pressure on the periphery. With Germany leading the way in ‘imposing flexibility and restraining real wages’ (p.23), the peripheral countries have found themselves ‘losing competitiveness relative to Germany in the internal Eurozone market’ (p.25). In relation to this ‘race to the bottom’, it must be stressed again that ‘gains in German competitiveness have nothing to do with investment, technology, and efficiency. The competitive advantage of German exporters has derived from the high exchange-rates at which peripheral countries entered the Eurozone and, more significantly, the harsh squeeze on German workers’ (p.28).

Sluggish German capitalism, in short, is sustained by its Euro-domain, at the expense of both German workers and European workers generally. Meantime, committed above all to maintaining the Euro as a world currency, the institutions of the EU are deeply committed to neoliberalism. The drive for low inflation, deregulation, privatisation, labour ‘flexibility’, and the shoring up of finance-capital at any cost is relentless.

The financial crash has exposed the entire rickety structure as unsustainable. The austerity demanded is self-defeating. Because of the imbalances, the peripheral countries’ debts, and the frenzied speculation of the bubble phase of the boom, the European banking system has been left tottering on the edge of the abyss. The EU, dominated as it is by the Germans and other north Europeans, has responded with bailouts and austerity; effectively a massive siphoning of wealth from workers and public services, especially in southern Europe, into the coffers of the European banks. The authors talk about ‘the holy trinity of austerity, liberalisation, and privatisation’ (pp.180-1).

Drop the debt

Austerity, of course, is competitive. The risk of credit-rating agency downgrades, speculative attack, and rising borrowing costs afflicts one country after another according to the relative speed and success with which they shore up their crumbling finances. Austerity itself becomes part of the generalised beggar-thy-neighbour behaviour that is integral to the entire inner working of the EU.

The crash, in short, has turned the contradictions at the heart of the EU into a massive, ongoing, and apparently insoluble crisis; one in which the entire policy of the ruling class is to drive the European economy ever deeper into a depression; one from which the only possible salvation lies in default.

The authors provide a useful summary analysis of the defaults and devaluations carried out by Russia in 1998 and Argentina in 2001-2. Neither event was the disaster predicted. Both events prepared the ground for recovery. The historical experience provides a useful riposte to the frothing predictions of Armageddon that proposals for default invariably engender in neoliberal spokespersons.

By contrast, the authors’ discussion of default is reasoned, honest, and compelling. In effect, they argue, there is no rational alternative, and the real discussion ought to be how it is done. Focusing on Greece, but with implications for Europe as a whole, they discuss ‘creditor-led’ and ‘debtor-led’ default and exit from the Eurozone, further distinguishing between ‘conservative’ and ‘progressive’ exit. Here we reconnect with the deeply political character of economics, and the authors are clear that the outcome will depend on the balance of class forces.

Default and the breakup of the Eurozone would represent a massive defeat for finance-capital and the European ruling class. It would almost certainly be fiercely contested, with any workers’ government attempting to break out of the neoliberal straitjacket facing financial boycotts, economic sanctions, and quite possibly politico-military coercion. It would, in short, create a head-to-head confrontation between the lords of finance-capital and the European working-class. That is why ‘drop the debt’ amounts to a transitional demand on the road to revolution.

Neil Faulkner

Neil Faulkner

Neil Faulkner is a freelance archaeologist and historian. He works as a writer, lecturer, excavator, and occasional broadcaster. His books include ‘A Visitor’s Guide to the Ancient Olympics‘ and ‘A Marxist History of the World: from Neanderthals to Neoliberals‘.