Exit the Euro? Polemic with Greek Economist Costas Lapavitsas

Buenos Aires.

A broad spectrum of people from Nobel Prize in Economics winners Paul Krugman and Joseph Stiglitz to members of Syriza’s Left Platform, are defending – with more or less resolve – the need for Greece to abandon the Eurozone. “The Case for Grexit” (1) is the title of an article by Costas Lapavitsas, the well-known Greek Marxist economist and member of the Left Platform, which was published in July in “Le Monde Diplomatique”. Here we review some of the main concepts developed by the author and further delve into the polemic which has already begun. Lapavitsas correctly states that under the German dictates “the outlook for Greece would be bleak (. . .) Unemployment is likely to stay at very high levels, and there is no real prospect of a recovery in incomes, which have fallen by more than 30% for many. An already ageing society, laden with debt, will lose its better-educated youth to emigration. The ensuing geopolitical weakness is easy to imagine: Greece will dwindle into historical irrelevance.” In contrast, the author suggests that the exit from the Eurozone “would not be easy, but monetary history and theory offer a route.” Let us see.


Lapavitsas suggests that Athens should suspend its membership of the Economic and Monetary Union (EMU), without exiting the European Union (EU). Greece would suspend payments on public debt abroad, mainly to the International Monetary Fund (IMF) and the European Central Bank (ECB), but should continue to honor its commitments to private creditors. It would then propose an International Conference in order to obtain a restructuring of its debt. The Government would then commit itself to meet all its obligations to domestic agents in full. The country would then resume control of its Central Bank, which would abandon the Eurosystem (the monetary authority of the Eurozone and its sole currency, the Euro) but remain within the European System of Central Banks. It would then nationalize the banking system and new, healthy banking institutions established. Capital and banking controls would be put in place. Bank deposits and loans governed by Greek law would be converted to a new Drachma at a rate of one to one. However, Lapavitsas then warns us that the new Drachma would more than likely depreciate quite significantly in value in the first few weeks, before eventually stabilizing after several months, with a fall of around 10 to 20 percent of its initial value, while inflation should only rise by a modest amount. The needs of the most vulnerable social groups for basic commodities (eg. petrol, food and medicine) would need to be prioritised.

A minimum of preparation should be enough to avoid resorting to ration books. It cannot be denied that exiting the Euro and a debt default will have a high social cost (how high?), but that such a trial would only be temporary. Of course, the author continues, the period of austerity will last for some months (more austerity?) and will cause the economy to enter into recession (more?). But then . . . Greece can expect a recovery in growth. The country would then be able to shift away from the services sector and move resources towards industry and agriculture, as well as boost public investment and sustain private investment. Lapavitsas continues by saying that at the present time, the cost of austerity in Greece has been borne overwhelmingly by wageworkers, pensioners, the poor and the lower middle class. A left-wing government should use default and exit to shift the costs of the crisis onto the shoulders of the better off and alter the balance of power in the country in favour of labor.

There is no doubt that this episode would reduce the purchasing power of the population by making imports more expensive. But it would also reduce the value of housing and other loans. After the initial shock, the revival in economic activity would encourage workers to protect their jobs and gradually lead to an increase in wages which would allow for the redistribution of national income. Europe is being slowly throttled and it needs a jolt to bring it to its senses. Throughout history, Greece has often played a role disproportionate to its size and this may now be another such occasion . . . with this last statement we can certainly agree, but not in the way that Lapavitsas suggests.

Between the gallows and the electric chair

First, and as we have already pointed out last week in “Greece: The End of the Reformist Utopia”, it should be noted that, even at a technical level, this plan has a limited chance of success in the context of the current global economic situation, the weakness of Europe, the delicate geo-strategic position of Greece and the particular characteristics of its economy. But let us work around these constraints for the moment, assume that the strategy of Lapavitsas is feasible, and get to the heart of the matter.

Lapavitsas recognizes, somewhat reluctantly and as unwanted side-effect, that even after the income of broad sections of society has fallen by 30 percent over the last few years, this devaluation would be a further blow to the purchasing power of these people. But such a reduction in purchasing power is, if we tell the truth, not just “collateral damage” but the central facet of what devaluation aims to do in its attempt to increase the foreign “competitiveness” of a capitalist economy. This devaluation involves a rise in the price of imported products which at the same time reduces the wages and incomes of the poorest sectors. The more an economy depends on imports – on which Greece depends a great deal – the greater is the effect of the increase in the price of imports on domestic prices. The recession that Lapavitsas refers to is the consequence of a process that will necessarily see a fall in import levels and devaluation occur. Normally these processes of recession allow for the improvement of the external balance of payments in so far as it produces an increase in exports in relative terms, thus enabling an increase in the trade surplus. At the same time, unemployment increases and the wages of workers who are still employed are undermined. In turn inflation, which according to Lapavitsas should be moderate, usually takes off after a rise in the price of imported products, because this leads to increased costs and falling profits that capital owners then seek to recover by raising prices. In conclusion, recession and inflation give rise to a fall in real wages, which in the final analysis ends up favouring the employers’ bottom line. Such a devaluation of the Drachma, which the author complacently estimates will fall by a maximum of 20 percent, would in fact translate, according to some analysis, to an additional drop in income by a further 30 percent at the minimum. If we add a fall of this magnitude or even one a bit more moderate to the reduction in the incomes of broad sectors of the population that has already occurred, one ends up with a reduction of around 50 percent. However, Lapavitsas then adds as some sort of incentive, that what will occur at the same time is a reduction in the real value of housing and other loans in Drachmas. To tell the truth, this decline is nothing more than what Keynes called a “monetary illusion”. The real value of domestic debts will be reduced by the devaluation of the Drachma, but as we have already shown, incomes will be reduced for the same reason. In this way, for the workers and the poor sectors of the population, debts will be reduced as a percentage of wages and income. But, depending on the specific dynamics of the process, these debts will more than likely end up at an almost identical level in real terms. On the contrary, those who would benefit from such a reduction in the real values of these domestic debts would be the owners of capital, who would be favored by falling wages and the resultant rise in “competitiveness”. On the other hand, the bulk of Greek public debt which has hit 247,000 million Euros (177% of GDP) is not with the IMF and the ECB (whose combined debts, which Lapavitsas proposes to suspend the payment of, represent 39,500 million Euros), but with the European States that through the various “bailouts” have absorbed most of the debts of their respective private banks.

The devaluation of the Drachma would immediately translate to an increase in the value of the national debt in Euros. This increased debt would very likely end up being paid for by the workers and the poor through either increased taxes or reductions in state expenditure. Lapavitsas then tells us that, after all of this, in an uncertain future, the recovery will arrive. If we accept, with great disbelief to be honest, the possibility of the development and completion of such a complex situation like this without any “shocks”, then what we are effectively saying is that some sort of economic recovery should come after this initial disaster and after a few more years of catastrophe. At the end of the day, that is precisely how capitalism works: during a crisis, such destruction lays the groundwork for future capital investment and therefore for reconstruction. However, in the course of such as recovery, the workers and poor people of Greece would fight to regain the lost value of their wages and income. When workers come close to either recovering these losses or surpassing them, the “competitiveness” of capital would then be under threat, which would surely see the preparation of the next crisis that would then require further reductions in income. It is a familiar story, like the labor of Sisyphus. All the while, capital is concentrated in other centers and the benefits of this enhanced accumulation are lost. As a consequence, a new destruction of capital is required. Thought of in this way, there is no solution in the interests of workers and the poor, who either have misery heaped upon them or barely manage to recover what they have previously lost. This is not a question of a technical discussion on the best economic plan. The choice between belonging to the Euro or an exit in the style of Lapavitas is like choosing between the gallows and the electric chair. This is a political discussion that must involve a critique of the economy of capital.

The role of mobilization in the economy

But why must we only think of the future of the Greek economy in terms of the needs of capital? Why can we not think about, for one example – and one opposed to the proposal of Lapavitsas – that the incomes of workers and the most impoverished sectors should not only not fall in real or nominal terms, but should be raised to an absolute minimum, that of the cost of living for an average family? Why not prohibit all layoffs and demand the occupation of industries that threaten such layoffs? They will of course tell us that if they are required to, for example, share all available hours of work and pay a minimum cost of living salary, then companies will be forced to close down due to their falling profits. But factories, shipyards and businesses that provide services are all entities that exist independently of their owners.

Therefore, in so far as the owners of large Greek and foreign companies oppose this – and they will – why not expropriate the property and the assets of, for example, the shipping industry magnates? Why not re-nationalize without compensation all the previously privatized companies such as the telecommunications company OTE, currently in the hands of German capital? In order to speak the truth, and because of the close ties between banks and big industrial capital, commerce and services, it is simply unthinkable and utopian to nationalize the first – as Lapavitsas proposes – without nationalizing the second.

It is not possible to seriously attempt to nationalize the banks without touching the property of big capital. This nationalization and creation of a single banking would centralize the disastrous national accounts and put their collection into order. The understanding of the true movements of the large fortunes of the rich through the elimination of commercial secrecy would allow for the imposition of progressive taxes on these vast sums. This would also enable the granting of cheap loans to small farmers and homeowners.

These measures should of course be considered as a part of a comprehensive plan that includes ending all further negotiation with the Troika, an end to the payment of any and all of Greece’s fraudulent and unpayable debt, and the nationalization of foreign trade, along with other measures. But the key to all of this is that a plan of this kind cannot simply be regarded as an “alternative economic program”. It has to be regarded as a question of class. What is actually required is the setting in motion of the working class and the impoverished sectors of society on the basis of the fight for their own class interests. This is the very opposite of the strategy coming from the heads of Syriza, which consists of pacifying the masses and paving the way for the redemption of capital.

When we speak of the importance and the role of mobilization, we are not only referring to strikes and demonstrations. In the case of leading the destiny of a nation, what we are referring to is the economic mobilization of the masses. That is, their management and participation in the everyday economy and their role in bodies of control and management that oversee the banks and the nationalized companies. The workers and the poor involved in the direct management of the economy would avoid corruption and guarantee distribution. It is a question of involving the masses in the making of their own destiny. Lapavitsas is right when he says that little Greece can play a historically disproportionate role . . . but it will only be achieved with politics of this kind, politics that truly transform the “balance of forces” in the country and enthuse millions of people across Europe and around the world to see that working people can control their own destiny. These millions of people will not hesitate to take to the streets, to shut down factories and transport, and to boycott the policies that are intended to make the Greek people suffer. Such a course – which the Left Platform is far removed from and the revolutionary sectors must take into their own hands – would begin to make this “terror” a reality for not only Germany and the European Union, but also the United States and all their supposed democratic friends and allies.

Translation: Sean Robertson.


(1) Change Europe or Evict Greece? The Case for Grexit.
Costas Lapavitsas, “Le Monde Diplomatique”, English edition [Paris], July 1, 2015.

Paula Bach is an Economist (Universidad de Buenos Aires), Columnist for La Izquierda Diario / Left Voice and Member of the Partido de los Trabajadores Socialistas (Argentina).