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Costas Lapavitsas: The crisis triggered by Germany now targets France, as elites debate leaving the Euro

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

In France in recent elections there’s been great successes of the farm-right parties.

Now joining us to discuss what all this is about is Costas Lapavitsas. He joins us from London. He’s a professor in economics at the University of London School of Oriental and African Studies. He teaches the political economy of finance. He’s a regular columnist for The Guardian newspaper. And his recent books are Profiting without Producing and, before that, Crisis in the Eurozone.

Thanks for joining us again, Costas.


JAY: So for a long time there was a lot of focus on the peripheral countries in terms of the crisis of the eurozone, but now the crisis is coming into the bigger, more centralized countries, with France seeming to be in the next target, and political repercussions thereof. What’s going on?

LAPAVITSAS: France is indeed where the action is moving, so to speak, as far as the eurozone crisis is concerned. The crisis began, obviously, in the periphery–Greece, Ireland, Portugal, and so on. Policies were applied the last four years. The periphery has been pacified, beat into the ground, in a sense, and there’s no immediate crisis there.

But the underlying problem was never resolved and is now appearing very prominently in France. Let me explain what this is. The problem of the eurozone, to start with, fundamental problem was never a problem of too much borrowing by the Greek state or just too much banking in Ireland and so on. The problem was always capital-labor relations. The problem was always unit labor costs, the most basic measure of competitiveness, diverging fundamentally.

The periphery had unit labor costs that rose very fast in relation to Germany, and it lost competitiveness and it had huge deficits.

JAY: Alright. Just a quick definition of unit labor costs.

LAPAVITSAS: Unit labor costs are basically the national measure of competitiveness. It’s a problematic measure. All measures of competitiveness are problematic. But it’s a national measure of competitiveness. It measures the nominal labor costs–not the real labor costs; the nominal labor costs–and it’s pretty close to inflation. Basically, it’s a very closely correlated measure with inflation.

JAY: How much can a worker produce for x amount of money in comparison to other places.

LAPAVITSAS: Not the production. It’s the cost, the nominal cost, which basically is closely connected to prices, not what the worker takes home in real terms. But it’s the nominal cost to the capitalist, basically, which is closely connected to inflation. That’s why we can get a sense of national competitiveness in the world markets by looking at unit labor costs. We could have done it done it in terms of inflation, but unit labor costs offer up similar insight. And also they tell you what’s happening in terms of capital and labor.

So in the eurozone what happened was, 15 years ago, really, the German employers began to keep unit labor costs right down, and also in this way to reduce real wages, too. They basically squeezed their own workers as viciously as they possibly could. Now, that gave them, obviously, a competitive advantage in relation to the Greeks, to the Irish, and so on, who did not succeed as much as the Germans, and a huge competitiveness gap emerged.

Policies were then applied to the periphery that absolutely crushed unit labor costs by creating huge unemployment and by causing, basically, massive recessions in those peripheral countries. And the periphery has been beaten to the ground.

However, much less noticed was that during the same period, a gap was also emerging in relation to France. France actually allowed unit labor costs to change pretty much in line with the inflation target of the European Central Bank. But Germany has been keeping its own unit labor costs below target.

JAY: And what France was doing was more or less what everyone had agreed to do. Is that right?

LAPAVITSAS: Exactly. France has actually been hitting the inflation and unit labor cost targets very accurately. But Germany has been keeping its own unit labor costs way down, because the German employers, often in cahoots with the unions, unfortunately, agreed to take this arrangement. Now, that meant that the competitiveness gap also began to emerge between Germany and France–not as severe, to start with, as between Germany and the periphery, not as violent as that, but nonetheless important enough.

The difference now is that while the periphery went through a period of crushing labor costs by creating unemployment and therefore reducing the gap with Germany, France has not done that. And the gap with Germany has actually been increasing. The reflection of that is what you see for the French economy as a whole: increasing current-account deficits, external deficits, inability to compete within the confines of the eurozone, lack of growth, rising unemployment, a general malfunctioning of the economy as a whole within the confines of the monetary union. That is really the root of French problems. France is actually being asphyxiated within the Monetary Union. It’s the same problem as it was for the periphery–not on the same scale yet in terms of the sharpness of it, but obviously on a much greater scale, considering the size of the French economy, because it’s one thing for Greece to develop external deficits and not to be able to breathe within the Monetary Union; quite a different thing for France.

JAY: Now, how or why or is this to being connected to the rise of the far-right in France?

LAPAVITSAS: Well, to understand that, you’ve got to see what has been happening and what the options are for France. France basically has three options in front of it.

One is to continue with how things are, which obviously will make the situation more and more untenable; possibly apply some sunlight austerity, which is what the present French government is doing, which doesn’t solve the problem but aggravates people, because, obviously, it affects welfare, affects their pay packages and so on, without solving the problem. That’s the first option, which the French elite has been applying for three or four years now and the present government has continued–the Hollande government has continued us.

The second option is to go the way of the periphery, to go the way of Greece, Spain, and so on, in other words, to follow the recipe of Germany, which is to crush unit labor costs for the French economy.

JAY: Which means trash French workers.

LAPAVITSAS: Crush French workers, yes. If France were to do that, though, obviously there would be an almighty recession for Europe as a whole, because the French economy is very, very large by European standards. So that’s a very difficult thing for France [incompr.]

JAY: And there’d also be millions of French workers on the streets.

LAPAVITSAS: And obviously there would be very severe political repercussions within France.

The third option is, of course, for France to exit the European Monetary Union and to have a realignment of monetary affairs, and the French elite is very seriously discussing this, very seriously discussing this at the moment.

Now, French people, workers and others, unlike the people of the periphery, feel more confident because of the size of the French economy and because of the position of France in the European Union and the Monetary Union. They understand full well that the Monetary Union has not worked to their own interest. They realize that they are facing an increasingly difficult situation, and they’re looking for leadership. Unfortunately, the leadership is given to them by the extreme right instead of being given to them by the left. The extreme right has worked out what’s–some of the deeper roots of the problem are, is actually arguing against the European Union and against the Monetary Union. And, as the extreme right always does, it is connecting this to immigration and race. It has given it a racial dimension, the dimension against immigrants, which is, of course, deeply problematic, as is always the case with the extreme right.

Nonetheless, because it is touching, you know, a raw spot in France and people realize that actually this corresponds to their reality, it’s gaining and influence. And in the coming Euro elections, it is quite likely that the extreme right in France will emerge as the real winner, with a very, very significant proportion of the vote.

JAY: Now, the extreme right, if they were to come to power, you would think although the rhetoric is about immigration and this and that–and I assume they would have policies in that context–but they would turn on the French workers, you would think, even more viciously.

LAPAVITSAS: I don’t really want to contemplate the possibility of the extreme right in France taking power. It would be to horrendous to contemplate for France and for Europe as a whole. That’s not a very nice prospect at all in just about every respect. It would be–it would imply the complete failure of everything that has been going on in Europe for decades now.

If they were, however, to do well and if they were to come to power after that–and the two are not related; doing very well in the Euro elections next month doesn’t necessarily mean that they will come to power. But if they were to do well and to emerge as the nominal party, and then much more if they were to come to power, then what French workers can expect will be very unpleasant from them.

But also what is likely to happen would be a rather rapid process of dismantling of the monetary union and deep unrest and tribulations for the European Union as a whole. So it would be a very nasty turn of events for Europe economically, socially, and politically.

JAY: Now, the French Socialist Party, which really has nothing to do with socialism, is there in fact a party of the left that can contend in these elections, next elections?

LAPAVITSAS: That, in a sense, is the most disappointing thing. France captures the deeply disappointing behavior of the European left.

What is needed in Europe right now is a healthy left-wing Euro-skepticism. That’s what Europe is lacking. Europe is lacking a party of the left, a sizable party of the left, or a coalition of parties of the left that will come out and say, the European Union and the European monetary Union are not left-wing institutions. They are not mechanisms put there to serve the interests of workers and of working people generally and of the ordinary people in France and elsewhere, that just such a party doesn’t exist.

The left in Europe, for reasons that are very deep and go back a long time, has been sold pretty much on the idea that these institutions are somehow progressive projects. And you can see that in the case of France, the left-wing parties in France. They can criticize capitalism and they do criticize that capitalism. They criticize the French employers, the French bourgeoisie, and so on. They’re very good at that. But when it comes to the European Union and the European Monetary Union, they are not very good at all. They just haven’t got a coherent criticism to put forth, a Euro-skepticism that actually means something to workers.

This is a new development, actually. Even two decades ago there were left-wing parties all over Europe that understood full well that the European Union is not a left-wing project. And they were very critical of that.

JAY: Alright. Okay. Well, this is just the beginning of this discussion. Costas has agreed to do a weekly conversation about finance, but particularly what’s going on in Europe, and both economically and politically.

So we’ll pick up this discussion next week, Costas.

LAPAVITSAS: They can very much.

JAY: And thank you very much for joining us on The Real News Network.


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Costas Lapavitsas is a professor of economics at the School of Oriental and African Studies, University of London