What a monetary union needs – In this section, the Stability and Growth Pact (SGP) is introduced, although rather bizzarely it is stated that “the fact that at the beginning of the 1990s many policy-makers considered harmonisation and low public budget deficits to be crucial for the success of EMU is irrelevant for the events that threaten the existence of EMU today” (8). In fact, it is the very architecture of the EMU which accounts for many of its present failures. Similarly, the fact that the Europea Central Bank (ECB) is constrained in its operations vis-à-vis the public authorities of its members is not just a failing of neoliberal thinking (10). Such a constraint is embodied in its very statutes and thus an essential component of the EMU. Unit labour costs determine inflation – This section contains a definitive statement of the Flassbeck/Lapavitsas analysis. Namely, that “unit labour costs (ULC) can be be regarded as a perfect instrument to forecast and control inflation” (11). This is indeed a bold statement both analytically and empirically. Analytically, inflation is subject to a multiplicity of factors influencing both the supply side of the economy (costs of various inputs, market structures, etc.) and the demand side. Isolating the influence of labour costs oversimplifies the inflationary process. Furthermore, referring to the ULC as the “perfect” predictor of inflation overlooks the influence of the other production factors on productivity. Empirically, even though a correlation between ULC and inflation can be detected, this does not suffice as a basis for the absolute inference made above. In this sense, the conclusion that “nominal wages should not rise more than the national growth rate of productivity in each member country plus this common inflation target” (13), albeit elegant, is rather simplistic. Wage growth determines the growth path of domestic demand – This is presented as an additional merit of a wage path that is tied to national productivity growth and an inflation target. On the assumption of no “external shocks due to a fall in competitiveness” (14), a stable growth path of domestic demand is also assured. Is there a problem of wage levels? – Apparently not, if a number of bold value judgements and assumptions are made. Namely, (i) “no country can consume more than it produces in the long term” (15); (ii) “the level of unit labour costs would be the same in a poor and in a rich country, provided that in both countries a major conflict about income distribution and inflation can be avoided” (15); (iii) “there is no reason why it should not be possible for poor as well as for rich countries to manage the ULC growth in the economy as a whole in such a way that it is in line with the relevant inflation target” (15). This is an ideal world operating on an ideal time scale!  How long is the long run over which a country has to balance its consumption with its production capabilities? How can a “major conflict about income distribution” be avoided in a capitalist, class society? Even if a historical compromise can be achieved between capital and labour, the analytical and theoretical pitfalls of a policy based on ULC growth preclude it from being such a straightforward policy tool. Overall, this chapter suffers from the omission of the links between finance and the single currency and finance and the real economy. In view of the heightened state of financialisation of the global and the EU economy prior to the crisis such an omission weakens the analytical strength of the argument.

Chapter II: What went wrong with EMU?

Inflation as a monetary phenomenon and obsession with fiscal targets – It is stated that “the need to avoid inflation differentials and the ability of member states to stick to the common inflation target over a long time were regarded as much less important for the smooth functioning of EMU” (17).  However, this is not completely true since one of the convergence criteria concerns the candidate states’ inflation rate in relation to the average of the three best-performing ones (Art. 140 of the Treaty on the Functioning of the EU/VIII: “ the achievement of a high degree of price stability; this will be apparent from a rate of inflation which is close to that of, at most, the three best performing Member States in terms of price stability”). Similarly, while a fiscal target may not be directly related to an inflation target (the arbitrariness of the Stability and Growth Pact (SGP) fiscal targets is generally accepted), the restrictive fiscal policies dictated by the S GPhave also a disinflationary aspect, which cannot be dismissed lightly. Two important points are made in this section. The first one is about the compact between the German government and the unions whereby the latter agreed to “reserve productivity growth for employment” (18). This political-economic aspect of the debate is not developed further in the rest of the paper. The second point is about the less-than-productivity-growth rate of increase in wages, which went “unquestioned” (18). This point is elaborated further in relation to the question of trade imbalances. However, the fact that wage restraint resulted in increased profits and that this was one of the factors fuelling financialisation in a low-interest rate environment in Germany could and should have been taken up. A huge gap in competitiveness emerges – This section deals with the trade imbalances between Germany and the Southern European countries, which grew at a very high rate after 2000. Interestingly, the onus is placed on Germany, rather than the ‘core’ countries, which is a more common approach. Also, the role of finance in closing the financing gap of the deficit countries is not mentioned. This was a factor that was encouraged by the monetary and financial integration of the EU and which was taken for granted, as is the case in periods of ‘euphoria’, according to Minsky’s financial stability hypothesis. While blaming Germany, as the hegemonic power in the EMU for its policies is understandable, the overall framework of analysis should not get out of sight. Competition of nations? – Two points need to be made in relation to this part. They concern the role of the trade unions in the fall of the share of wages in GDP and in the current crisis. More specifically, the collapse of the Soviet block in the 1990s was one of the factors accounting for the weakening of the position of labour and of the unions in Western countries. Furthermore, in the current crisis, collective negotiations have been either weakened due to the high and rising unemployment, or suspended altogether in the bail-out countries (such as Greece). In both instances, the role of capital vis-à-vis that of nations should not be underestimated. Didn’t Germany succeed? – While Germany achieved a steady trade surplus in the framework of the EMU, those who benefited were the elites – industrialists and financiers, etc – rather than the “country” (29) in general. While the authors seem to be aware of this distinction, it is worth keeping it in mind throughout the analysis. Furthermore, Germany is condemned as having taken advantage of the “naïveté” (26) of its partner countries while its trade success is seen as the result of the “numbness of Germany’s neighbours and the blind eye of the institutions created to guide and to oversee the euro-zone’s proper functioning, in particular the ECB and the European Commission” (30). The objection to these remarks relates to the fact that the ‘blind eye’ of the European institutions is a structural feature of the neoliberal development of EU policy while Germany’s neighbours were happily financed by German (and other European) banks to feel ‘numb’. Asymmetric adjustment is a must – The wage reducing policies adopted by the European leaders viz-a-viz the indebted EU countries are rightly here rejected as analytically wrong (“it destroys domestic demand and overall production before it can bring relief through rising exports” (32)) and a danger for democracy (“a democratic country cannot possibly sustain five to ten years of falling living standards and rising unemployment, neither economically nor politically” (32)).  Instead, it is proposed that wage policies should rely on the growth of productivity plus the inflation target. As already pointed out above, this view, albeit interesting, tends to ignore a host of other factors determining the rate of inflation. Furthermore, the stipulation of a single numerical inflation target for the EMU countries is as arbitrary as that of a single fiscal target.

Chapter III: The role of banking and the central bank

The problematic financial structure of EMU – The divergence between an EU-wide monetary regime and national bank supervisory structures is discussed in this chapter, as is the lack of an EU-wide system of deposit guarantee and bank resolution mechanism. These are indeed major flaws of the EMU. The fact that five years into the crisis such fundamental regulatory measures have not yet been implemented is an indication of the amount of resistance put up against them.  Which are the forces resisting such reforms? What are the prospects of them being introduced? These are interesting questions worth discussing in this context. Bank insolvency and liquidity shortages – The instrumental role of the European banks in financing the trade deficits of EMU member states is explicitly recognised in this section as is the fact that “the euro-zone crisis from the beginning was a banking crisis, i.e. a crisis of bank solvency” (38). However, this is due to the role of finance and financial speculation both in the buildup to the crisis and in its escalation. In both instances finance was encouraged to take an increasingly more risky position as a result of financial deregulation of the EU, the low interest rate environment prevailing, and the October 2008 decision by the European Council to support the banking sector unequivocally. Centrifugal tendencies among EMU banks – The banking system of the EU maintained most of its national characteristics as opposed to other financial markets which achieved a high degree of integration in the 2000s. Following the crisis, both the financial markets and the banking sector have become more nationally oriented. This is not necessarily a negative development as it may limit the sphere of influence of global finance. However, the emphasis on the privatisation of the remaining public banks in the bail-out countries as well as on the on-going restructuring and concentration of the banking sector in the EU operate in the opposite direction.  Furthermore, the tensions between these trends and the institutional inability of the ECB to deal effectively with the crisis are likely to increase.

Chapter IV: Misguided economic policies – the stock-flow dilemma and the crucial role of fiscal policy

Flows are more important than stocks – This is indeed a valid point, leading to a critique of the EU prevalent approach to the public debt crisis, i.e., emphasising the stock of public debt while ignoring its increase in real terms (flow) as wages and prices decline. As Flassbeck/Lapavitsas consider that “most of the effects mentioned (competitiveness) here are symmetric between the deficit and the surplus country, respectively between the depreciating and appreciating country” they conclude that “a slow but steady solution of the competitiveness gap problem could be achieved, while rising German demand would fuel the other economies” (48). This is certainly correct. However, the deep-seated structural problems of both the industrial north and the services south are subsumed under the inverse relationship between wage growth in the former and wage restraint in the latter. Addinitonally, the role of financial speculation in picking up on such balancing out changes is left out altogether. Overall deflation has become a major threat for EMU – The final draft of this section is shorter than the previous one. The missing paragraph however makes a very important and interesting observation. Namely, “at this moment the crucial political question for all countries is: How long can democracy survive in a situation where one government after the other becomes unable to stimulate the economy and reduce unemployment.”(50, second draft). In a crisis, countercyclical fiscal policies are indispensable – An interesting distinction is made in this section stating that in ‘normal times’ there is no need for macro policy. Instead, inflation is to be controlled through nominal wage changes (and ULC), while monetary policy is to deal with the “technical aspects” of money markets (what about financial markets more generally?). However, as the authors admit, “times are rarely normal”. Hence, their conclusion that “the government then has to proactively replace the missing borrowers and investor in the private sector” (52), with which I fully agree. External balances and the role of fiscal policy - the German case – Germany is again criticised for its export-oriented growth policy and its wage restraint. The remedy offered is for Germany to mend its ways enabling the north and south of the eurozone to rebalance their trade accounts. As pointed out in relation to earlier sections, this view is correct but incomplete. The rebalancing of competitiveness between north and south requires more than a rebalancing of nominal wage rates and ULC. However, the authors appear very pessimistic about any rebalancing, or “cooperative solution” taking place. Hence, they conclude that “it is either joint political pressure of the southern European countries, including France, that will move the German position, or the crumbling of the walls in one country after the other, and/or a looming panic in many countries at the same time” (66). This is indeed a very pessimistic conclusion! However, it does raise the question, what about the German trade unions? What is their role in this process? Will they expect the weakened labour force and trade unions of the south to fight for raises in German wages? Will they again trade off employment for wage increases? If so, would they not be working against the interests not only of their own members, but also of workers in the south?

Chapter V: Conclusions

The transfer problem and the need for sustainable external accounts – The ‘transfer problem’ denotes the need for creditor or current account surplus countries to relax their export-oriented growth policies so as to allow the deficit ones to catch up. The fact that Germany is actively pursuing policies to the opposite effect at the present time is (quite rightly!) lamented. However, the fact that austerity and labour market liberalisation is being strengthened throughout the EU in the aftermath of the crisis seems to elude the authors. This trend underlines the fact that the policies Germany is currently identified with are of a much broader perspective, as neoliberalism (in Germany and elsewhere) is making an effort to regain its dominant position in the EU. Tough choices ahead for the Eurozone – The futility of the German approach and the inability of the ECB to “extinguish the fire” other than putting it “temporarily under control” is discussed in this section (73). Furthermore, the important point of the threat to democacy this policy entails is made: “those countries that have gone quite a way in improving their competitiveness (i.e. Greece) prove that this is the wrong way for all the others. If France and Italy were to pursue similar adjustments as the smaller European countries at the periphery, the result would be a depression and deep and long lasting deflation in the whole euro area. Such a development would most likely strengthen radical political movements and put democracy in jeopardy” (77). The balance of costs and benefits of being a member of EMU shifts rapidly – This section draws the Flassbeck/Lapavitsas argument to its logical conclusion. The role of the ECB is once again criticised, while the need for a banking union is implied although not explicitly stated. Reference is made to the debacle of the Cyprus bail out and its implications for EMU membership. An orderly exit for EMU inside EU – This is described as a “safety net” to be provided by the EU to those EMU member states that wish to leave the eurozone. It is further proposed that the European Monetary System that existed prior to the EMU is brought back. The authors believe that “the new EMS could allow countries to peg their new currency at a reasonable rate to the euro, thus reducing the risk of becoming a punching ball in the international financial markets” (81). The question does of course arise as to the viability of such a project. Why should the new EMS prove more viable than its predecessor, which collapsed in September 1992, as one currency withdrew after the other? Also, it is worth noting that although the authors explicitly recognise the role of financial speculation in destabilising the financial markets they make no suggestion with regard to financial policy reform and/or isolating such markets at least for the time necessary to stem back the crisis through the use of e.g. capital controls (as Cyprus had to do). A political union or a transfer union are no way out – This statement is based on the notion that a currency union was too ambitious a project (“realistic observers have to admit that currency union was too ambitious a goal” (81)).  Furthermore, the authors believe that “at the core of the failure of EMU lie the German mercantilist economic model and the inability of the other European countries to question this model openly and to convince Germany that it is not even in that country’s own interest to opt for competition rather than cooperation of nations, in particular among the members of the currency union. Acknowledgement that the lack of a spirit of cooperation will be a fact of life for the foreseeable future has to shape a reform of the institutional arrangements for a peaceful division of labor in Europe” (82). This is an idealistic view of the European Union and of the class struggle its past and present history entails. Nations consist of classes. The present European elites are driving a hard bargain to maintain their hold on society across the EU. It is up to the European people (broadly defined) to overturn the order of things that is attempted to being imposed on them. Such an overthrow includes the radical restructuring of the EU’s order of priorities and of the policies that serve these priorities. It is through the unified efforts of those who suffer in the present crisis under the weight of austerity policies and the dismantling of what remains of the welfare state that the struggle can go on and can hope to succeed.