Post-Keynesianism and the eurozone crisis

Issue: 148

Brian O'Boyle

Mark Baimbridge and Philip B Whyman, Crisis in the Eurozone: Causes, Dilemmas and Solutions (Palgrave Macmillan, 2015), £75

Crisis in the Eurozone has all the hallmarks of academic writing. Written by two Post-Keynesian economists, it takes the reader through sections recounting the economics of monetary union, policy making within the eurozone and proposed solutions to the eurozone crisis. The overarching theme of the book is that European Monetary Union (EMU) has been an unmitigated disaster. Instead of allowing national governments discretionary tools to manage their economies, EMU binds participants into a policy straitjacket inspired by the economics of neoliberalism. The result has been a widespread lack of “effective demand”, manifest in considerably lower growth and employment rates than in the rest of the OECD (Organisation for Economic Cooperation and Development). Added to this general malaise, EMU also suffers from debilitating internal imbalances. Countries in the core of the system (Germany, Austria, the Netherlands, etc) generate export surpluses, which are mirrored by deficits in the so-called PIGS (Portugal, Ireland, Greece and Spain). The upshot is the ongoing crisis that has wracked the continent for nearly a decade.

For readers of International Socialism none of this will seem particularly original. Costas Lapavitsas made much the same arguments in the pages of this journal more than three years ago (“Working People have no Interest in Saving the Euro”, International Socialism 133). According to Lapavitsas, the eurozone is structured into a central core dominated by large-scale European capital and a periphery increasingly unable to compete. Over time the structures of EMU have exacerbated these imbalances, leading to the problems referenced above. Lapavitsas regrettably builds his case without the use of value analysis. That said, he does make sure to root the crisis in the class dynamics of European capitalism.

Baimbridge and Whyman prefer to think in terms of hegemonic ideas that have captured European policymaking. Much of their opening section is consequently devoted to the changing nature of academic economics. First off, they recount the oft-repeated story of how the emergence of stagflation in the early 1970s sounded the death knell of orthodox Keynesianism. Thereafter, they explain the various iterations of neoliberal economics that have culminated in what they refer to as New Consensus Macroeconomics (p41).

To the reader interested in the internal dynamics of the eurozone crisis, much of this material will likely feel tedious. The authors spend two full chapters recounting differences between Keynesians, New Keynesians, New Classical Theorists and New Consensus Macroeconomists which effectively boil down to degrees of faith in ­free-market capitalism. On the ­far-right of the theory/ideology spectrum, New Classical Theorists insist that people have enough information to form what are known as rational expectations. This assumes that individuals make optimal decisions in markets that operate without any slack at their output potential (in other words when the economy is using all of its economic resources effectively). In such scenarios, government action is necessarily unhelpful. Governments have neither the need nor the ability to act in the interests of capitalist economies. Economic activity is self-regulating and the best thing that governments can do is bind themselves into mandatory rules.

According to the authors, the entire architecture of EMU comes directly out of this academic orthodoxy (p107). In terms of tax and spend policy, governments have been forced to adopt rules associated with the Stability and Growth Pact and the Fiscal Compact. Taken together, these rules forbid governments from running any form of expansionary policies, regardless of whether the economy is depressed. In terms of monetary policies, the rules are even more restrictive. The European Central Bank (ECB) is fiercely independent of government interference. Its board exerts exclusive control over interest rate policy, while exchange rates between the members of the common currency were fixed at the start of the integration process.

As Keynesians, Baimbridge and Whyman lament the lack of government discretion associated with EMU. As social democrats, they also lament the lack of democracy that underpins each of these monetary arrangements. From their perspective, the euro area is built on extremely shoddy theoretical foundations. Neoliberal convergence theory was used to cobble together divergent economies in terms of their growth potentials, productivity levels and underlying competitiveness. Binding countries as different as Germany and Greece was therefore a foolhardy venture. No ­monetary union has ever survived over the very long run, let alone one without a political sovereign to watch over and protect it (p57). In these circumstances the criteria for joining the euro should have been water tight. Instead they were extremely deficient, focusing on cyclical variables and financial indicators instead of the structural features of growth and productivity (p103).

Drawing on the theory of optimal currency areas (OCAs), the authors insist that a successful monetary union would require three main attributes: most importantly, regional economies must be roughly similar in their technical capacity; thereafter, OCAs must have effective tools to eliminate internal divergences and the flexibility to adjust to external shocks (p60).

The eurozone currently has none of these qualities. Far from bringing convergence to the economies of Europe, EMU has facilitated an increasing gap in technological competitiveness. Core business consistently outcompetes its peripheral rivals, running up massive surpluses in the process. In a fiscal union part of this surplus could be redistributed through progressive taxation, but no such mechanism exists within EMU. Instead, core surpluses are either saved or recycled into the periphery as loans. For Baimbridge and Whyman neither “solution” is particularly sustainable. In a policy reminiscent of mercantilism, core countries effectively beggar their peripheral neighbours by amassing wealth instead of spending. The result is a lack of effective demand throughout the eurozone, leading to a significant drag on overall activity (p100).

In the “Keynesian era”, peripheral nations could counter some of these deflationary effects through expansionary monetary policies. By reducing their interest rates and devaluing their currencies they could generate much-needed demand while gaining in competitiveness. These were tools of choice in many of the PIGS.

But the rules of monetary integration no longer allow them. Faced with the Stability and Growth Pact, technological laggards must engage in what is euphemistically known as internal devaluation. Most Europeans know this as austerity. In place of the monetary flexibility associated with Keynesian demand management, neoliberalism preaches the flexibility of labour markets. Slashing wages and social services is part of a wider assault on workers’ ­conditions. To their credit, Baimbridge and Whyman recognise the reactionary forces driving this process (see pages 9 and 119). EMU has proven particularly effective for disciplining labour, but the end result has been to undermine purchasing power throughout the continent. According to their estimates, for every cut of 10 percent in government spending there is a 15 percent fall in GDP. This makes neoliberalism self-defeating—austerity creates a downward spiral of debt, deflation and unemployment (p134). When one thinks of the Greek situation it is hard to argue with the general assertion. Greek workers have faced cuts of up to 40 percent in their incomes in a country that is scarcely closer to resolving its indebtedness.

Faced with policies that have no hope of working, Baimbridge and Whyman prove themselves willing to break with the euro. Before they do so however, they take the reader through a series of reparative strategies that flow from their preceding analysis. The first strategy is fiscal cooperation. Assessing the historical evidence, Baimbridge and Whyman ­conclude that every successful fiscal union has entailed significant transfers from wealthier to poorer regions. Referencing the United States, they further conclude that progressive taxation and direct transfers offset between 17 and 30 percent of the advantages received by more competitive regions (p163). Unfortunately, political realities within the euro area preclude the emergence of a similar type of fiscal arrangement. At only 1.24 percent of eurozone GDP, the current EU budget reflects the fact that core governments are simply not prepared to transfer wealth across national boundaries. Instead they have engineered Troika “loans”, in return for structural (neoliberal) reforms and increased surveillance. Former Greek finance minister Yanis Varoufakis famously labelled this strategy “extend and pretend”. Baimbridge and Whyman refer to it as “kicking the problem down the road” (p156).

As a form of common insurance, eurobonds have also been muted as a more conservative means of addressing the problem of internal imbalances. But the current position of the German Constitutional Court means that eurobonds are unlikely to happen and even their full implementation would fall far short of a genuine solution to the eurozone crisis.

To counter the mercantilist policies of northern governments, Baimbridge and Whyman advocate more radical proposals. In their view, the surpluses amassed through EMU are incompatible with an economy operating at its output potential. Core countries are effectively suiting themselves while forcing deflation onto their peripheral rivals. A sustainable solution to the eurozone crisis needs systematically to eradicate surpluses by evening up the economic playing field. Drawing on John Maynard Keynes’s plans for the ­post-war global economy, the authors note how an international clearing union (ICU) could penalise surpluses that remain unused (p173). Under the rules of an ICU, creditors would be forced to adjust their positions either by allowing their ­currencies to appreciate or through increased domestic spending and internal reflation.

Assessing the likelihood of either outcome within the strictures of EMU the authors are rightly pessimistic. In their view, to adopt such policies would be to undermine the fabric of European policy making along with the neoliberal ideology at the heart of the euro. Instead they advocate an ordered exit in favour of full national economic management. In line with their theoretical commitments, the authors believe that a decisive government could break with the euro and use Keynesian tools to reflate the economy. In the short run they advocate: exiting the euro; nationalising the banking system; recreating a national currency; imposing capital controls; protecting essential services and redistributing wealth (p192). Over the longer term they also advocate targeted reductions in corporation taxes, research and development and greater spending on education. Taken together, this mix of private enterprise and active government should result in a more equitable economy operating at or near its long run potential. The recommendations are general to any country but Baimbridge and Whyman specify that there is more to be gained by peripheral countries from such a strategy.

What are socialists to make of all of this? Given the current reticence of the Syriza leadership to face down the terror of the EU elite, Baimbridge and Whyman’s account of an institutional structure incompatible with any form of progressive politics is timely and welcome. The authors are considerably to the right of many strands within Syriza, but their Keynesianism forces them to look reality in the face when it comes to the limits of monetary union.

That said, these same theoretical supports are extremely problematic when it comes to explaining the crisis and charting solutions for European workers. Throughout their book, Baimbridge and Whyman mis-specify EMU as a technical project built on shoddy theory and deficient policy making. The working assumption is that good economic sense has been replaced with neoliberal orthodoxy incapable of sustaining sufficient levels of economic activity. In reality, EMU is a ruling class strategy designed to revive the fortunes of oligopolistic European capital. Lacking the value analysis at the heart of Marxist political economy, the authors also assume that profits, output and capacity utilisation can be quickly re-energised outside the constraints of monetary union (p203). Yet this assumption is repeatedly belied by evidence throughout the rest of the system. Try as they might, global policy makers have been unable to revive the fortunes of capitalist economies mired in a long run crisis of profitability. Indeed, many mainstream commentators are now beginning to accept this reality, characterising the period since 2008 as one of “secular stagnation”—see the Financial Times articles by Martin Work on 14 April 2015 and Alan Beattie on 22 April for example. The structures of EMU have undoubtedly added to this crisis in terms of severity, but there can be no panacea in a top down reorganisation of capitalism along Keynesian lines. For genuinely progressive solutions to the eurozone crisis we still require the revolutionary ideas of Marx and Lenin.