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Costas Lapavitsas is a professor in economics at the University of London School of Oriental and African Studies. He teaches the political economy of finance, and he's a regular columnist for The Guardian.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington.As the situation in Europe, particularly as it relates to Greece, seems to continue to move over the abyss, what about the United States? How affected will it be? And what about U.S. policy towards Europe and what it's saying about the situation in Greece?Now joining us to talk about all of this is Costas Lapavitsas. He's a professor in economics at the University of London School of Oriental and African Studies, he teaches the political economy of finance, and he's a regular columnist for the Guardian. Thanks for joining us again, Costas.COSTAS LAPAVITSAS, ECONOMICS PROF., UNIV. OF LONDON: Hello.JAY: So President Obama a few weeks ago, when asked about Europe, he made a kind of a, I thought, kind of funny comment, given the irony of it. But he said, you know, there's plenty of money in Europe; if they want to solve this, they could. And, you know, one could say the same thing about the U.S. But still, what Obama says is true. And then you hear interviews with Wall Street pundits and various senior people in banks on Wall Street, and some of them are talking about how Europe needs stimulus and you shouldn't push this too far. So it's somewhat different signals coming out of New York and Washington than out of Europe. How do you explain the policy difference? And then, how can Obama kind of just kind of be passive in all this? If Europe really unravels, the American economy is not going to be so swimmingly doing well about it.LAPAVITSAS: First thing to say is that the U.S. establishment and President Obama, they have not been passive. But I'll come back to that step in a minute.The difference in policy is very, very interesting, though. And you're right. Itâfirst of all, it gives the lie to the old notion that the Anglo-Saxon capitalism is [incompr.] tooth and claw. And this is where it's every man for himself and the devil take [incompr.] whereas European capitalism is welfarist and solidaristic and Keynesian in outlook. We now know that this is not the case. This is not at all the case. In fact, at the core of the European policymaking establishment, there is hardcore neoliberalism, and it's actually harder-core in many ways than what we get in the United States.Now, why might that be the case? Of course there are many reasons for it, reasons of ideology and so on. But one thing that is very, very important and has to be said clearly, I think, has to do with the nature of the euro. You see, it has to be appreciated that the euro is not a normal, regular common currency among some collection of countries. You know, there are common currencies in West Africa, for instance, common currencies in other parts of the world. The euro is more than that. The euro is an international currency that wants to compete against the dollar, that wants to give advantages to large, concentrated capital in key European countries.For this reason it has very particular requirements. It needs an independent central bank and a very conservative central bank. It demands fiscal conservatism, very tight fiscal conservatism. It protects the financial interests before it protects any other interests. And the people who have set up the euro have understood from the very beginning that this kind of new currency would only work given the interests that exist if they viewed it with a thorough neoliberal outlook in policymaking. And that's what we see in Europe. You see the triumph of this even if it creates negative effects.JAY: Now, what happened? Because post-World War II, and until fairly recently at least, compared to the United States, there was much more of a social safety net in Europe. We kept hearing stories about the superiority of the French health care system. Students would go to university practically for free. I mean, there's a lot of elements of a society seem to be far more collectivist or social than, certainly, compared to the United States. So what's changing?LAPAVITSAS: I do not wish to exaggerate the transformation. It still is the case that you have powerful and well-functioning welfare systems in states in Western Europeâin Scandinavia, for instance, in Holland. We have a national health service that works reasonably well in the U.K. and an extensive health system in France and so on. These things are real and they're present, and the United States would do well toâfor its people to acquire some of that sooner rather than later.However, that must not beâwe now know that it is a mistake to think that this somehow specifies a different type of capitalism existing now in Western Europe, because what has happened in the last 20 years is that, I would say, sectoral, narrow interests of big business and big banks have come to set the terrain of economic policy in Western Europe, coalescing around the Monetary Union. And these are very hard-nosed economic interests. The way they think about the world is very neoliberal. In fact, it's identical to what you get in the United States.And often the people who produce the policy documents and the economic theory that supports these documents are European economists trained in the United States. Basically, you have a transplanting of the most conservative outlook from the United States to Europe, and like all transplantations of this type, it is inferior to the original form. Where the AmericansâAmerican economists might produce this kind of thing genuinely and spontaneously, the Europeans usually imitate, and what comes out is narrow, rigid, dry neoliberalism. And that has become very, very powerful and setsâin conjunction with those interests, sets the terms of the debate and of policymaking in Europe to the extent to which they cannot even see what is in their narrow immediate interests, because, you know, many, many people have pointed out that even from the perspective of, say, Germany or other core countries in Europe at the moment, it would make sense in the medium term to preserve its ascendancy if it softened things up a little bit.JAY: I guess this is the story of the scorpion and the frog. The scorpion stings the frog as they go across the river, "'Cause it's in my nature," says the scorpion. But how much does this have to do with, still, fallout from the fall of the Soviet Union, that there isn't sort of that kind of competitive pressure to have more social programs and such, in order to show that capitalism was humane as whatever was going on in the Soviet Union?LAPAVITSAS: I am not sure thatâI do not wish to take a position on this. No doubt the collapse of those states in the East has had a major effect. It's obvious. Everybody knows it. But I do not wish to speculate on how major, how big that impact has been. I think equally important things have been taking place in the realm of ideology among economists and so on and in the realm of business and finance, and I think that's where the major forces for the hardening of line in Europe have come from.JAY: Well, if this really does continue to unravelâand there seems to be no reason to think that it won't, the Greek crisis, the euro crisisâthen what about Obama and the American economy and the coming elections? One of the things talked about in the U.S. is thatâone of the wildcards is that if Europe really does implode, then Obama's going to be facing another major economic financial crisis and this may jeopardize his reelections. And what, if anything, can the Americans do about it?LAPAVITSAS: It is not easy to work out exactly whatâthe extent of the interconnections. There's no question that the economies are interconnected. There's no question that if the crisis in Europe continues to deepen and if Greece steps out and a big shock follows, that the United States will be affected. It is not easy at the outset to work out the precise connections. One thing I will tell you for sure is that banks are related to each other, connected to each other. And they're connected in a variety of ways. U.S. banks appear to be significantly exposed to European banks. But European banks are also dependent on dollars for liquidity.Now, this, because, of course, you see, through the euro, European banks expanded enormously, and they expanded their dollar-based business. And therefore they need dollar-based liquidity, and that can only come from the Federal Reserve. And at critical junctures throughout this crisis, we've seen the Federal Reserve step in and provide dollar liquidity to European banks. And they didn't do it out of the goodness of their own heart; they did it because they realized that unless they provide the dollar-based liquidity to European banks, then there would be a credit crunch, a severe credit crunch in Europe, and that would impact U.S. banks exposed to European banks. That reality's still there. It hasn't gone away.So I expect that if things get worse in Europe and if a liquidity problem reemerges for European banks, a dollar liquidity problem reemerges for European banks, then there the U.S. authorities would step in, because they know that they themselves are in line for a shock if things in Europe become very bad.JAY: And I guess they could do that and sort of keep things from hitting this fan, I suppose, beyond the elections. But how long can they do this, if they can even do that? I mean, how long can they keep this thing from really unraveling?LAPAVITSAS: Provision of liquidity alone, as we now again know from the experience of the crisis, will never solve the problem thoroughly. This holds for Europe itself, for the provision of liquidity by the European Central Bank. Just before Christmas, when it provided â¬500 billion worth of liquidity to the European banks, it certainly ameliorated the pressures and eased conditions for European banks. The provision of liquidity previously by the Federal Reserve, dollar-based liquidity, had a similar impact on several occasions. But liquidity alone does not solve the problem, because the problem comes from deep structural defects which create solvency issues.Ultimately, Greece cannot pay debt. And the same holds for Portugal, the same holds for Ireland, the same holds for other countries. This will undoubtedly impact on the banks. In other words, it's a solvency issue. Someone has to face up to that and provide the necessary cash. Central banks cannot do that. Central banks can only lend money. And they can lend money for a long period of time.Let me just make one point here, which I think is very important. People haven't appreciated it. Often we hear about liberalized finance, that we live in an era of liberal finance, free markets, flow of capital, and so on. Well, I think that this is one of the biggest connings of the last couple of decades, you see, because quite apart from the general fact that we've seen the biggest banks in Europe and in the United States consciously turning to the states to rescue them in the crisis, what we've seen the state do in Europe in the last couple of months is quite simply unbelievable. The European Central Bank, this very conservative and very proper and very, you know, orthodox agency, is now providing European banks with three-year money. It's fixed the rate of interest that banks pay for three years when they borrow from the European Central Bank. This is unconscionable. Three-year money at very low rates is basically a license for private banks to make profits. Now, if they can fix the rate of interest applied to banks as they have done, something which, I repeat, we've never seen anything like that before, why can't they fix the rate of interest in other markets too? What exactly is it that privileges banks and allows them to receive this state munificence, but the same thing cannot be extended to mortgage holders or to businesses borrowing to invest and so on? Nothing at all, it seems to me. This is clear manipulation of the levers of economic and monetary policy to favor the banks, a process which is denied to everybody else.JAY: And just to go back to the point in the beginning, I said, quoting Obama, that there's plenty of money there. But that's the point, isn't it? There's plenty of money, but the elites are not going to part with it. And the same thing in the U.S. Nor will they let wages rise. So one would think the choices that seem to be there are basedâbut there's assumptions that these elites simply won't cross, there's lines they won't cross to get there.LAPAVITSAS: That is correct. But clearly what we see in Europe and in the U.S. is, of course, naked manifest domination of class interests, basically. They will notâthey will make profits and they will not take steps that are necessary to rescue the situation. One thing that's clear, though, and I wish to stress it in the case of Germany, and Europe more generally: people say that what Germany needs to do is to follow expansionary policies, Keynesian policies, to even out the deficit surplus problems and to put the European economy on an even keel. And, of course, when you approach it as an economist and you look at it as an abstract economic problem, there's no doubt at all about it that this would make a big difference.However, you see, you've got to appreciate, from the perspective of German big business (industry, banks, and so on), asking them to raise wage rates is asking them to cut their own throats. And it is highly unlikely, it's impossible that a capitalist ruling class will do that of its own accord. Someone has to push them for it, someoneâpush them into it. Someone has to demand and obtain that. Without the movement, without grassroots demands for higher wages, such a thing would never happen in Germany or anywhere else, I think.JAY: Thanks for joining us, Costas.LAPAVITSAS: Pleasure.JAY: And thank you for joining us on The Real News Network.
DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.
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