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Eurozone Crisis: True Causes and Effective Therapies Costas Lapavitsas SOAS/RMF June 2013 A political project? Economic basis of the EMU Unwillingness of Germany to act as anchor of EMS Monetary union as an equitable and democratic institution Complex nature of EMU A formal alliance to create an international reserve currency – the main competitor to the US dollar. A formal alliance to create a domestic monetary standard – the national money of 17 sovereign states. Inherent weakness of EMU International and domestic roles of the euro clash with each other. The changes needed to make them compatible are highly unlikely given the social, political and institutional conditions in Europe. Clashing roles of the euro appear as: Systematic divergence in competitiveness/inflation Systematic imbalances in current accounts Sudden and violent shifts in capital flows Hence the international functioning of the euro has re-emerged within the EMU, but masked Unit labour costs/Inflation, coreperiphery ULC in Germany, France, Southern Europe 135 130 125 120 115 110 105 100 95 Inflation target of 1.9% 2012 2011 2010 2009 ULC Southern Europe 2008 2007 2006 ULC France 2005 2004 2003 ULC Germany 2002 2001 2000 1999 90 Current account deficits, core-periphery Current account balances Germany, France, Southern Europe 10% Introduction of the Euro 8% 6% 4% 2% 0% -2% -4% -6% Germany France Southern Europe (Greece, Portugal, Spain and Italy) 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 -8% German ‘other’ capital flows by region EU policy toward the periphery Fix ‘international’ malfunctioning through austerity, privatisation, liberalisation. Replace private flows from abroad with official flows from the ECB and EFSF as well as by ELA. Catastrophic results: Collapse in demand, huge social costs, debt position has worsened. Shortage of domestic private credit as banks hoard liquidity with ECB. Lack of growth prospects and rising social tensions ULC and GDP path, Greece 145 140 135 130 125 120 115 110 105 ULC Real GDP 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 100 ULC and GDP path, Portugal 135 130 125 120 115 110 105 ULC Real GDP 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 100 ULC and GDP path, Ireland 170 160 150 140 130 120 110 ULC Real GDP 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 100 Most immediately dangerous: Fragmentation of banking Tightening of links between national banks and nation states Diverging interest rates on private debt Liquidity from the ECB can ameliorate the problem but not fix it 2013-Q1 2012-Q4 2012-Q3 2012-Q3 2012-Q2 2012-Q1 2012-Q1 2011-Q4 2011-Q3 2011-Q3 2011-Q2 2011-Q1 2011-Q1 2010-Q4 2010-Q3 2010-Q3 2010-Q2 2010-Q1 2010-Q1 2009-Q4 2009-Q3 2009-Q3 2009-Q2 2009-Q1 2009-Q1 2008-Q4 2008-Q3 2008-Q3 2008-Q2 2008-Q1 2008-Q1 2007-Q4 2007-Q3 2007-Q3 2007-Q2 2007-Q1 2007-Q1 Peripheral bank government bond holdings as % of assets 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% The underlying problem persists: France and Italy ULC 140 135 130 125 120 115 110 105 100 95 Germany Greece Spain France Italy Inflation target of 1.9% 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 90 An alternative within EMU? Marshall plan for the periphery to raise productivity Rebalancing the German economy Debt cancellation Restructuring finance Income and wealth redistribution Little chance of this happening, hence a break-up is likely A realistic alternative? Institute exit option for peripheral countries Reconsider the extent of monetary union for core countries Manage exchange rates Banking and capital controls Shift away from neoliberal policy