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Costas Lapavitsas: Crisis deepens as Germany fails to sell-out 10 year
bonds; the public must take over the financial system

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And on Wednesday it was announced that German ten-year bonds that were for sale, only somewhat over half were actually sold. It’s been described by some analysts as a disaster for the eurozone, lack of confidence in German bonds. Now joining us to deconstruct the significance of this and the whole eurozone crisis is Costas Lapavitsas. He’s an economics professor at the University of London. He’s authored many books, including Financialized Capitalism: Expansion in Crisis. He’s a regular columnist for the Guardian newspaper. Thanks very much for joining us, Costas.

COSTAS LAPAVITSAS, PROF. ECONOMICS, UNIVERSITY OF LONDON: Thank you very much for the invitation. It’s a pleasure to be here.

JAY: So start with the German bond issue, and then take us into what’s going on now in terms of the crisis of the euro.

LAPAVITSAS: We don’t know exactly what happened today. We’ll have to wait a little bit longer to get the full story. It’s very fresh at the moment. But if half of it is true, if half of what we’re picking up from the news across the world is true, then it’s a very serious development, because basically it appears that buyers of European bonds, sovereign paper, public bonds, have now begun to move away from Germany. There’s been noise about this for several days. It appears in particular that Asian buyers, Asian buyers are taking fright, Chinese and Japanese buyers in particular are taking fright, and moving away not just from other Eurobonds, you know, France, Italy, Spain, and so on, but even Germany. It appears that–.

JAY: So this isn’t–is this about lack of confidence in the eurozone and the German bond? Or is it because yields are so much higher in some of the peripheral countries now? Or are they just getting out of Europe altogether?

LAPAVITSAS: I think they’re getting–from what I understand, they’re getting out of Europe altogether. And the reason appears to be significant concerns about the eurozone holding together. You see, Germany, despite what has been said time and again over the last few months, is very significantly exposed, and potentially it could be much more exposed. Germany–let me make one thing clear. Germany has not yet given any money, right? People talk about bailouts and they imagine that Germany and other countries from the core have actually given money to countries in the periphery. No one has given any single penny yet. Nothing. However, Germany has actually in one way or another taken upon itself significant risk from its intervention so far, mostly through the Bundesbank, mostly through its own central bank, and the way in which is implicated in the European system of central banks, the ECB, the European Central Bank. A lot of the purchases that the European Central Bank has made of sovereign bonds of countries in difficulty effectively mean that some risk shifts towards the Bundesbank. So that potentially means a risk for the German state. Now, German debt, public debt, is not insignificant. You know, it has never been insignificant. It’s actually worse than Spain. It’s actually higher than Spain. So Germany already has a significant debt, and it’s acquired some hidden debt through the Bundesbank. Now, any talk, as has happened in the last few weeks, of the European Central Bank issuing Eurobonds or purchasing the bonds of other states in huge numbers effectively means that Germany would be acquiring even more risk, even greater potential problems as far as debt is concerned. Germany’s basically asked to underwrite the whole thing. The German economy is not big enough, it’s not big enough for this, and it already has significant amounts of debt. So it appears–and again, we don’t have the full story, but it appears that non-European investors, particularly Asian investors, are getting cold feet out of this.

JAY: So let’s go back to basics here, ’cause there’s lots of different theories and analysts talking about why this crisis is taking place. What is your take on the roots of this?

LAPAVITSAS: The problem with this is something which a lot of US economists and non-continental economists pointed out many times before. Economists who came from different ends of the political spectrum, incidentally, very conservative ones, but also nonconservative Keynesians and so on, people pointed out at the beginning of this attempt to form a monetary union that it didn’t make sense to put economies in countries of very different levels of competitiveness, very different patterns of productivity growth and levels of productivity, into one monetary union and to impose on them a common fiscal policy, or at least common fiscal discipline, a common monetary policy, and to take away from them the freedom to change the exchange rate. Many people pointed out that such a thing is potentially explosive and highly unstable. And I think this is what we’re witnessing. This is what’s happening. During the last ten years, these economies that entered at a very different levels of productivity and competitiveness have actually diverged, have actually become even more [incompr.] different when it comes to competitiveness and productivity. And that’s the root of the trouble.

JAY: Now, some people have suggested that Germany has benefited a great deal over the past decade with this, with keeping the German mark down, being able to flood the peripheral countries with German products, and this is somehow to some extent of chickens coming home to roost. What do you make of that?

LAPAVITSAS: That’s exactly it. When I said that the monetary union has put together countries of very different productivity, what this has basically meant was that Germany, which had a higher level of competitiveness and productivity levels than the periphery, was able to pull away and improve and increase its competitiveness advantage. And therefore it developed surpluses, substantial surpluses. And these surpluses were reflected in the deficits of the periphery. Germany has benefited very, very substantially from this. Can I just make one point on this, though?

JAY: Yeah.

LAPAVITSAS: The reason why competitiveness has improved even more for Germany has nothing to do with technology, with high levels of productivity growth, with German efficiency, and all the things that people usually associate with German capitalism. That isn’t it. The reason why Germany has been able to improve its competitiveness so much more than others is because German employers have been ruthless at keeping wages and other labor costs frozen, basically. It’s actually German workers who have carried the burden of improving German competitiveness over the last 15 years. That’s the sole reason, and the most important reason by far, in making the monetary union a success for Germany and for German businesses.

JAY: And to what extent does this crisis also connected to 2008 mostly American financial crisis?

LAPAVITSAS: It is the same crisis. Without question, this is one crisis. These are not two crises. This is the same crisis. It’s one global systemic crisis of the world economy. It began as a real estate bubble in the United States, which collapsed. The real estate bubble became a banking crisis, as we know, a global banking crisis, and that then became a global recession. Now, the intervention by a number of states in the United States, of course, and in Europe in order to ameliorate this recession led to a problem of public finance, led to a situation in which a number of different countries began to present substantial deficits in their fiscal affairs. It’s very much the result of the crisis. It wasn’t profligacy by the state. Because we had this problem of fiscal deficits by a number of countries, banks then started becoming–coming under the shadow of a doubt again. The crisis now is threatening to go back to banks where it started, European banks and, obviously, the further removed US banks. It is the same crisis. It began in finance and it might go back in finance, and if it did, then this would be a gigantic disaster.

JAY: So how precarious a moment are we in?

LAPAVITSAS: Extremely. This is a very, very dangerous moment. This crisis that we’re going through is the–in a sense the pinnacle. It’s the coming together of tendencies and trends that were witnessed over the last 2 to 3 decades, whereby the financial sector has become progressively more and more influential, more and more powerful, and more and more profitable in a number of countries, while the productive sector has weakened in Europe and in the United States. This situation which has been so profitable for finance and the social strata associated with finance is now threatening to take us back to a situation of mass failure of financial institutions. If European banks go under–and there’s a threat that they might, because a lot of them are overexposed–then US banks might also suffer, probably would suffer. And then, if the banking system of Europe and the US began to malfunction so badly and banks began to collapse, then we might see a vast recession in Europe and in the United States. This has every chance and all the potential of becoming the biggest crisis ever in the history of capitalism.

JAY: What can be done? What should people be demanding?

LAPAVITSAS: The demands should be different at different levels and in different countries. They cannot be the same demand so easily formulated for so many different countries. But one demand that is very, very similar in many countries is control, command of the finance. Finance must be leashed. It must be put under control again. And this doesn’t simply mean regulation. Regulation is not enough, particularly regulation the way we’ve seen it the last few years, organized by bankers, reflecting bankers’ interests, and not really working in the end of the day. What we need is more than regulation; we need also public ownership of banks. Private banking has failed. It has failed in the United States. It has failed in Europe. It has failed in many other parts of the world. We need public ownership of banking. We need public control over banking and other forms of finance. We need to tame that monster, bring it back under some kind of control. And then we need to begin to think of how to restructure the real economy, how to rejuvenate production, how to begin to create jobs, and how to reinvigorate real activity, as it were, in order to create rising incomes and stable employment. The United States is one of the key countries that needs this. Real incomes, as I’m sure you know, have been stagnant in the United States for three decades for the majority of the population, while they’ve been increasing enormously for the top 1 percent. Finance is related to this, and the mechanisms of finance have been instrumental to this. The United States needs that type of change urgently. It needs to reconsider its real economy, it needs to reconsider how to rejuvenate production, how to create jobs, how to improve its infrastructure. And that–prerequisite for that is to control finance.

JAY: Thanks very much for joining us, Costas.

LAPAVITSAS: Thank you.

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

End of Transcript

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