If Henier Flassbeck and Costas Lavapitsas, the authors of Against the Troika, were researchers of the REScEU research project, their answer to the conundrum that the project is trying to explain (if it is possible to reconcile social and economic Europe) would be straightforward: “simply no”. To understand the authors’ political stance, it is important to explore their political backgrounds and the time at which the book was written.

Heiner Flassbeck is a German economist and intellectual, and large part of his work has been devoted to explaining European monetary, economic and fiscal policies. Moreover, he has recently engaged in the debate on the Eurozone crisis, doing so from a Keynesian perspective. For his part, the Greek Costas Lavapitsas is a professor at the University of London and a former member of the Greek left-wing political party, Syriza, for which he was elected an MP in the 2015 elections. However, he then left the party and formed a new one – called Popular Unity – due to his critical stance on how the party had handled negotiations with the Troika.

Flassbeck and Lavapitsas explain why a progressive political programme is incompatible with the current European balance of power, and why managed exit from the EU is the only option available for a Left government.

Against the Troika was written in the run-up to the Greek elections in January 2015, when there was much discussion of Syriza’s strategic options if it should win. At that time, Greece’s exit from the EU was envisaged, but it was portrayed by the majority of politicians and intellectuals as the “worst case scenario”. Despite increasing criticism of the European project, it was (and still is) difficult to find scholars and intellectuals openly defending the idea that exit was the only progressive option for Greece (and other debtor countries).

Filling the Grexit “theoretical” gap

It now seems clear that Flassbeck and Lavapitsas’s purpose was to fill that gap, given that the book’s main objective is to provide arguments for a managed exit from the EU. Although Against the Troika is written by two economists with academic backgrounds, the style of the text is closer to that of a political manifesto intended to provide a clear strategy for Syriza or any European Left government wanting to abandon austerity and neoliberalism. In this regard, Flassbeck and Lavapitsas explain why a progressive political programme is incompatible with the current European balance of power, and why managed exit from the EU is the only option available for a Left government.

As one might guess from the backgrounds of the authors, the cases of Germany and Greece take up most of discussion. Divided into twelve short chapters, the book is organized around three main themes. First, the authors consider the role of Germany in the years prior to the creation of the EMU and prior to the Eurozone crisis. Second, they explain why the economic policies adopted during the crisis were wrong, and why implementing alternative policies would clash with the neoliberal institutional design of the EMU. Finally, they provide an economic exit strategy for a Left government and focus on the specific case of Greece.

German monetary policies, such as the setting of interest rates, were decided without the needs of the overall system being taken into account.

The authors argue that, before the creation of the EMU, Germany was chosen as the “European monetary anchor for good reasons”. But they also maintain that the country soon started to adopt the wrong policy approach. German monetary policies, such as the setting of interest rates, were decided without the needs of the overall system being taken into account. The solution was creation of the European Monetary Union (EMU) with a European Central Bank (ECB). There are two main reasons why copying the German recipe has not been a good solution for debtor countries. The first is economic. Whereas Germany has thus far been able to ignore the drastic falls in domestic demand due to its impressive export sector, internal demand in Southern European countries has been destroyed before the export sector could yield them any significant profit.

The Bundesbank and its monetarist perspective became the role model for the ECB. This entailed the creation of a dogmatic inflation rate of two per cent for all European countries, in the belief that, jointly with controlling the money supply, it would eliminate inflation differentials among countries. However, that objective has not hitherto been achieved because the German monetarist position clashes with the neoliberal stance that the ECB and the European Commission have adopted in regard to labour-market theory.

The European institutions have repeated the “mantras” of labour-market flexibility and competitiveness, but without considering that Unit Labour Costs (ULC) are the units best suited to controlling inflation. If those institutions had linked the two per cent inflation target with wage growth, and if wages had been increased according to the productivity plus two per cent principle, there would not be the wide inflation differentials that exist today. But increasing wages according to productivity is contrary to the neoliberal idea of wage flexibility.

One size does not fit all

In the second part of the book, the authors use the dichotomy between the inflation target and labour market theory to argue that Germany was the source of the Eurozone crisis. The policies implemented to fight unemployment by the German governments in the past decade have been based on limiting wage growth, which has been at odds with the German position of maintaining a stable inflation rate.

Both the European institutions and the German governments have disregarded the possibility that these labour market policies might have a deflationary effect. In fact, as Flassbeck and Lavapitsas explain, Germany has constantly had an inflation rate below the target, and it has maintained a domestic wage-freeze policy by developing a “beggar-thy-neighbour” policy which has created unsustainable competitiveness differentials among European countries.

The problem is that, during the Eurozone crisis, the European institutions have forced Southern European countries to follow the same logic of wage cuts without considering the detrimental effects of this policy on their domestic demand. There are two main reasons why copying the German recipe has not been a good solution for debtor countries. The first is economic. Whereas Germany has thus far been able to ignore the drastic falls in domestic demand due to its impressive export sector, internal demand in Southern European countries has been destroyed before the export sector could yield them any significant profit.

The second reason is political. The asymmetric adjustment proposed by the European institutions and Germany, which has focused on the problem of debt (stocks) and not of growth (flows), is leading to rising unemployment and a decrease in living standards. As Flassbeck and Lavapitsas explain, if this situation persists for a long period, it will have serious consequences for our models of democracy, which will witness political unrest and upheavals.

In search of realistic solutions

For this reason, the third part of the book is devoted to finding an alternative economic and political path for the EMU. The authors argue that the only viable way to solve the competitiveness gap and maintain the EMU is a change of labour market policy in Germany. Larger wage increases in the creditor countries combined with moderate ones in the debtor countries would raise German demand and have a more positive effect on the economy.
However, the authors are realistic. Given the current balance of power in both Germany and the EU, a “plan of coordinated wage adjustment policies” is not feasible; nor is a political or a transfer union. Only if one country or a coalition of countries were to threaten Germany with exit could there be a change of course.

The major virtue of the book is the authors’ acknowledgement that debtor governments prepared for a confrontational exit that would lead to a debt default require strong popular support and legitimacy.

The question now is how to exit the EU in the best and least harmful manner. Flassbeck and Lavapitsas argue that debtor countries will face an “impossible triad” if they try to implement a progressive alternative path within the EMU. On the one hand, their debt is unsustainable, and they would have to achieve a total or substantial write-off; on the other, they would have to abandon austerity and achieve balanced economies. These two needs – restructuring the debt and abandoning austerity – are incompatible with EMU membership and would generate conflict within the monetary union.

When they wrote their book, Flassbeck and Lavapitsas did not know what would happen in Greece after the elections, but it seems that they guessed the obstacles that a Left government would face when negotiating with the Troika. However, the Syriza government did not go as far as the action recommended by the authors. Although Syriza did try to maintain the provision of liquidity to banks by the ECB and official lending while negotiating the terms of the bailout, it did not threaten exit in a credible way because it did not take other necessary steps, like restricting bank operations, imposing capital controls, or creating liquidity autonomously through the creation of a national currency.

Such measures would indeed lead to the requirement of exit by the EU. Therefore, a Left government willing to implement them would need strong popular mobilization and international support. The major virtue of the book is the authors’ acknowledgement that debtor governments prepared for a confrontational exit that would lead to a debt default require strong popular support and legitimacy.

Between politics and economics

Against the Troika is a must-have book for all those wanting to understand the economic difficulties that a Left government can encounter within the current austerity-biased European Union. Flassbeck and Lavapitsas reveal that the neoliberal design of the EMU clashes with an inclusive and participatory model of democracy because citizens cannot decide issues regarding economic policy. In fact, the political developments in Greece bear out their argument. In July 2015 a majority of Greeks decided in a referendum not to support the conditions of a new bailout, but the Syriza government disregarded the results and accepted financial assistance.

Protesting against austerity is one thing; leaving the EU is another. It therefore seems that the crucial battle in the future will be that between Left governments and their constituencies.

On the other hand, Syriza was surprisingly re-elected in the September 2015 elections, which proved that Greeks might be tired of austerity but were not ready to face the uncertainties that exit from the EU might bring. Protesting against austerity is one thing; leaving the EU is another. It therefore seems that the crucial battle in the future will be that between Left governments and their constituencies. And the political dynamics between them will depend on the extent to which they are willing to face those uncertainties.

But is exit the only alternative for left-wing governments? Flassbeck and Lavapitsas briefly discuss the possibility of forming a strong coalition of Left governments, but they do not develop the topic further. Although it is not the purpose of the book to explore alternative options within the EU, it fails to acknowledge that such coalition would indeed be an alternative for those on the Left who want to implement a progressive political programme without having to abandon the EU.

A strong coalition of Left governments could indeed change the balance of power, and might make the “plan of coordinated wage adjustment policies” feasible. A majority of Left governments could thus dismantle the neoliberal design of the EMU. However, this is a “chicken and egg”situation: in order to form that coalition, Left governments would have to be elected in the first place. In either case – exit or a change of the power balance – one thing is clear: progressive programmes need the support of the people through elections or mobilizations.

Against the Troika is a book on economics with important political consequences. The central idea of the book – that the neoliberal design of the EMU makes a progressive Europe impossible – is correct. But the manner in which it is presented by the authors is very static and does not take into account that political ideas constantly evolve. The current balance of power is undoubtedly pro-neoliberalism and pro-austerity, but arguing that it will be so forever is to neglect the role of political agency.

The courage and honesty of the authors in addressing an issue uncomfortable for the European left should certainly be acknowledged. However, it is also important to say that this book would improve if it included a chapter explaining the most recent European political developments. If this is a question of balance of power and not of structural constraints, we might foresee political struggles that would tip the balance of power to the left.


Photo Credits CC: Jayne Booton


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Henier Flassbeck and Costas Lavapitsas. Against the Troika. Crisis and Austerity in the Eurozone. London: Verso, 2015.


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