 Okay, thanks very much for coming tonight to this extremely timely meeting. It's hard to imagine a more appropriate day to be holding this discussion about the Eurozone crisis after the events of the last 24 hours, which are still ongoing and only now becoming clear. So my name's Seamus Milne. I work for the Guardian, and we've got four speakers tonight there. Felly, we're going to try and squeeze them in into the first hour and then in the second hour we want to have as full as possible a debate and questions and engagement on all the issues around the Eurozone crisis and the politics of the European Union right now. So, we are going to kick off with Costas Lapavitzis, who is a professor of economics here at SOAS, and is also one of the prime movers of the research on money and finance group which has done such excellent work on the crisis as it's evolved and has got its latest report just out. I would recommend it very strongly breaking up a route out of the Eurozone crisis and I think Costas is going to speak around that but much more broadly about the Eurozone crisis, its nature and possible routes out of it. So, Costas Lapavitzis, please start us off. Let me just try and find the... Someone raised the projector. Do you have a problem? We're being projected onto. Slightly too many characters in the picture. It needs to come up. Anyway. Yeah, we'll have to move sideways. There you are. Quick. Let's go further. We can solve the Eurozone crisis. We can't project a speech on it. Anyway, I'd like to welcome you all here to this event. Before I get on with it, I haven't got very much time, so I've got to rush through a hell of a lot of stuff. Before I get on with it though, I'd like to say at the outset how proud I am that research on money and finance, RMF, has been able to produce such sustainability, such sustained output on the crisis during the last year and a half, two years, and there's much more to come. And I'd like to say that this has happened without very much support at all. It's proof that you can do good quality research to say things that matter on a shoestring. You don't need the huge grants and the huge budgets that the various funders give them. I hope you have got any money going. So without further ado, let me get on with three things. First of all, to say something about the causes of this crisis which is not made in Greece. If I had a penny for every time I read in the press that this is because of the Greeks who are corrupt, unreliable and lazy, if I had a penny for every time I read that, I would have become a rich man and then I could have been lazy and wouldn't have done any work at all. But this isn't because of the Greeks. This is a global crisis, a crisis that began in 2007. It's one crisis deflected through the mechanisms of the monetary union. That's basically what's happening. I haven't got time to go into it in detail. All I want to tell you is that there are three elements that are very important in this which we've developed in RMF work. The first is competitiveness among the countries taking part in the monetary union. It has always been uneven and worse than that it has actually diverged in the course of the monetary union. That's really at the heart of the problem. Uneven and diverging competitiveness which of course led to current accounting balances. If you've got countries that belong to a union that have got uneven and diverging competitiveness, you're going to get current accounting balances, structural surpluses, structural deficits within the union. That is an unbalanced outcome and that has led to debt accumulation. Debt accumulation, especially foreign debt, external debt, is very much because of this. It's got nothing to do with fiscal profligacy and the like. Here is a little bit of evidence. I'm not going to spend time. If there's one graph that you should remember about the eurozone crisis and only one, it is this. This shows you competitiveness. In other words, unit labour costs between the core and the periphery. The core here is one country, Germany. It's right at the bottom. These are the costs of the periphery, the four countries of the periphery. The odd one out here is not really the periphery. It's Germany. What's been happening is eye-watering wage repression, wage restraint in Germany. That really has been the cause of the German commercial and other success in the union. You can see the cumulative divergence of it and then you can see what happens. After about 2008-2009 is the crisis hits and there you see the preferred adjustment policy by the union, which is to crush unit labour costs, to shift the cost of adjustment on labour by compressing the costs in the periphery and hoping to make the competitiveness gap disappear. You can also see there will be many, many years before even the cumulative loss of this time is reversed. On the basis of this graph, you can see. You can also see the mirror image of this, which I've already mentioned, the current account deficits and surpluses. You can see the scissors opening. As Germany gains competitiveness, it begins to have surpluses. As the periphery loses competitiveness, it begins to have deficits. You can also see the scissors closing after 2008-2009, beginning to close. Again, that is part of how the EU has dealt with it by crushing labour costs and by imposing austerity. You get the causes and the responses very neatly put into diagrams so you can see what has been happening. The response of the EU to this has actually made the crisis worse, however. That is one of the key paradoxes that we often see in capitalist economies and in policies to deal with them. Because the response, there is logic to it. Those who tell you that there has been no logic to the response to the crisis by the EU are not really with it. There is logic, but it's bad logic. That's what's been happening. The logic has moved along two axes. The first is they have attempted to stabilise the situation and stabilisation for them has meant austerity. Quite clearly, austerity to reverse the accumulation of public debt. That's the first element. The second element of the policy has been some kind of attempt to return to growth. And returning to growth, as I've shown you previously, has meant crushing labour costs, deregulating and privatising. So you get essentially the holy trinity of the last 30 years. Austerity, deregulation and privatisation. That's what's been applied to Europe. It's a classic adjustment strategy. Developing countries have seen it time and again. Those of you who studied at source or are studying at source would recognise it immediately. Those of you who haven't studied at source and think that these things happen somewhere in outer space, start thinking again because they're happening in Europe. The result is of course an ambiguous failure. An ambiguous failure, which you can see very easily. Here are the growth rates in the periphery. You can see reasonably high rates of growth in the years of the euro. You can see a massive dip as the crisis of 2007-2008 hits. The economies come back and then as soon as the adjustment goes into play, as soon as the EU begins to deal with the crisis, the economies go again into recession or recover stalls and we're about to re-enter recession. So economies are basically contracting again as a result of the policy applied. Stabilisation is also not working because if you look at public debt to GDP, in other words, restraining the growth of public debt, you will see that it's not working. You will see that in Ireland the growth of debt to GDP is off the charts because of course the Irish has shifted a lot of private debt onto public books and you will see that the growth of debt in Greece is also accumulating very rapidly because of course Greece is in an almighty recession which crushes GDP and therefore makes the debt proportionally much greater. Now, that much then about the causes and the outcomes very quickly of the policies applied to stabilisation. Where is the main risk? Where is the main danger in the banking system? This has begun as a crisis, a global crisis, 2007-2008, which of course already in those days it was a banking crisis. It began then as a crisis of the banks in 2007-2008. It then became a crisis of the public sector of some sort and now it's threatening to go back to the banks. It's the banks that are at the heart of it and the banks are in a very precarious position for three reasons which are in three interrelated ways. First, the banks of the core of the European Union are heavily exposed to the periphery. I will show you in a minute how that is. Secondly and very interestingly, the banks are increasingly reliant on their nation states. This is something which we've discovered as we were doing the last report. We didn't expect to find it. We have found that the national substratum is it where of bank relations in Europe has not gone away. It's actually becoming stronger. The banks, as they become weak, they deepen their session. Let me take you through some graphs very quickly. I'm not going to tell you. Pictures tell the story very easily. Here is core exposure to the periphery. The top graph is Italy, which isn't in the periphery. It's that in between state which makes it so dangerous. You can see the exposure of core banks to all these countries. You can see peaks in 2008 and in Italy it reaches gigantic levels. The exposure of French banks alone to Italian debt is probably of the order of 300 billion euros at the moment. Italy is big enough to blow the French banking system out of the water if it's defaulted. You can see that the exposure declines after the crisis, but it has a second peak after Lehman Brothers. After the collapse of Lehman Brothers it has a second peak. The reason is the banks of the core thought that lending to the periphery was a profitable and safe business. They made a classic error of judgment, market failure. They don't want to acknowledge it now. They don't want to pay for it, but it's there. You can see it in black and white. A second peak after Lehman Brothers, but then a continuing decline. Banks of the core remain heavily exposed to the periphery, but their exposure is perhaps declining a bit. What have banks been doing as their exposure to the periphery has declined? They have become more dependent on their own state. That's something which we see. Banks are becoming more dependent on their own state. There you can see the Greek banks. You can see what the Greek banks have been doing during the last three years. You can see that the holding they've got of government bonds declines, reaches a minimum in 2008, and then it begins to rise again. Who is buying government bonds? Banks of the nation state. The only banks buying government bonds there in Europe are banks buying the bonds of their own state. They're becoming closer to their own nation state. It isn't just Greece. Here is Italy. Same thing. Same process. The only banks buying Italian government paper today are Italian banks. Banks are getting closer to their own nation state. What does this mean? Banks and states can fall together now. The threat is that they will fail together. The banking system is so intertwined with its own nation state that it threatens to bring it down, and then the sovereign also threatens to bring the nation state down. Now, I can say a lot more about the banks, but I won't. I want to say a few things more, though, about the Greek banks, because I want to move on to Greece in a minute. What have Greek banks been doing as the pressure has been building up, and what can we learn about the banking system of Europe as a whole by looking at them? Again, I've got to be very quick, but I'll show you some lines which will tell the story neatly. The top thing you see there are deposits of Greek banks. You can see, as the crisis deepens, deposits decline. In other words, a bank run, a silent bank run. People are moving out of Greek banks. Greek banks are losing deposits. Now, the only thing rising in there is that blue line down there, and it's, of course, Greek bank borrowing from their own central bank. So commercial banks are losing deposits, and they are borrowing from their own central banks. They are becoming more dependent on their own nation state. We get a coming together again of national banks with nation state very clearly seen in Greece. If you look at where they lend, again you can see a similar story. Lending declines, generally speaking, so outside Greece, it becomes flat for the economy as a whole. So basically they're not financing the economy. They're not financing growth. They're making the recession worse. The only direction in which they are lending in Greece is to the state. They are lending to the Greek state. So banks, Greek banks, are typical of this, more closely connected with their state, less funding for their own national economy. What does this mean now? Can we bring it together? If you put all this stuff together, what you will see, and we argued clearly in our report, is this. The implications for the periphery are that if these policies continue and they will continue according to what we've heard reported in the news, will be long-term stagnation. The thing that the periphery has got to look forward to is long-term stagnation. And not just the periphery, possibly the core too. You're talking about the situation in which peripheral countries would have a recession for another year or possibly two and then low growth for possibly 10, 15 years. High unemployment, stagnation, no growth at all. Worth talking about for the forthcoming period. The room for an institutional fix is very limited. There is no mechanism to commit public money, as we now see very clearly. There will be no public money committed to it. The ECB will not intervene in a structural way demanded by many because it is constrained by its own structure. It's not a normal central bank. It's a bank of 17 states, not of a single state. Longer the shorter it is, as this continues and as the periphery finds itself deeper and deeper in trouble, there will be pressures for a break-up. There is only that much recessionary pressure that you can put on people in the periphery and elsewhere. There will be pressures building up for a break-up. This tendency towards a break-up comes from within the Eurozone, from what I've shown you. It's not a policy option, it comes from within the Eurozone. The Eurozone itself creates this tendency to fragment, as I've demonstrated. If that's the case, then the proper policy option should be to recognise reality, to recognise where things are going and actually to take charge of the direction of events and to guide the break-up and to guide the changes that have to take place in order to make these tendencies beneficial to working people, I think. This means two things. I've got all of five minutes to tell you. The policy shift that ought to take place, recognising these trends, would be to aim for default and restructuring of debt. Default is already accepted. When we first started talking about default, the VARMF and others did too. This was considered a swear word. Now it's already accepted. For Greece, only for Greece, not for anyone else. Mrs Merkel said very clearly, no one else is allowed to default. Only the Greeks will default. But this default for the Greeks is of a particular type. It's what I would call creditor-led default. It will happen on the terms of the creditor. It will be designed by the banks. Or at least the banks will have to acede to it. It will have to be allowed by the banks. For this reason, I would argue, it will be ineffectual. It will happen late in the day. It will protect the interests of bondholders. And it would endanger the ownership of Greek banks, as that happens. It will tend to shift the ownership of Greek banks into foreign hands. You might say, does this matter? I tell you it does matter. It does matter for growth prospects and for employment prospects. So default is already accepted, but it's the kind of default that you don't want to see very much of. The default you want to see is a default that I would argue should be debt or led. Yes, default is necessary. I'm glad that you acknowledge that, even in the case of Greece, but it should be debt or led. What does that mean? It means two things. Default must be first sovereign. In other words, it must be led by the Greek sovereign power. Or whatever other country. And it should be coercive on the banks. The banks should be told what the terms are, and the terms should be imposed on the banks. Greece and other countries of the periphery of the EU are not without weapons in this regard. Because you see sovereign bonds that banks hold have got no collective action clause, it's so-called. They've got none of them. The law under which they were issued is actually local law, Greek law in this case. So it's not British law. It's not London law. So if Greece defaulted in a sovereign way, it could change the law. It could change the law through an act of parliament and impose terms on the banks as possible to do it. Default must also be, though, democratic. Not just sovereign, but also democratic. It must involve broad layers of working people, the population at large, in the process. Knowledge of public debt is a democratic right. Public debt is a debt of the people as a whole. They've got the right to know what they're asked to pay. They've got the right to know, and that can only be defended and protected through an auditing process. There must be an audit of the debt. The audit must be independent. It must ascertain the quality of the debt. Is it illegitimate or illegal? And then it must offer an independent opinion and advice on how the debt should be repaid. In this way the default should take place. It should be sovereign and democratic. Let me show you what the default means in a bit more detail. I've got five minutes. Let me show you what default means in a bit more detail so that you don't think the default is easy. I say this because certainly in Greece, but also elsewhere, it's been very difficult to persuade people that default is necessary. And certainly people on the left of the political spectrum. But once they've grasped it, they are narrowly went to the far left of the political spectrum and argue that nothing should be paid. Default must be absolute. The debt must be repaid. We don't want to pay a penny to the capitalists. Let me tell you, it's a little bit more complicated than that. Because when you look at the composition of Greek public debt, you will see what a complex and multi-structured, many-layered magnitudes it is. You will see that private Greek banks hold a substantial amount, but also social security and other public entities hold a very large amount of debt too. These are the people that pay pensions. You can see that small households, petty savers, and non-profit organisations also hold significant amounts. Default must take that into account and must make sure that the claims of these people are protected in some way. These are not loan sharks. These are not speculations. If you look at foreign holdings of Greek debt, you will see that European banks hold a significant amount, but you will also see that the ECB holds a large amount, the IMF holds a large amount, the EU also holds a large amount. These are different laws. British law applies to EU and the ECB. Greek law applies to the European banks. You need a nodded commission and you need the sovereign approach to it. You need to dictate terms on how it's going to happen. It's no use saying that I'm not going to pay anything. Default is a complex process and it must take place in the way in which it just indicates. I haven't got any more time. Perhaps we can go into it in question. I promise I'll finish in a minute. Second thing about the policy shift, and I will be quick, is in addition to default there must be exit, I believe. Default, if it happened in a sovereign democratic way, asserting the rights of working people and so on, it would probably lead to exit. Exit from the monetary union, if nothing else, because of course the lenders belong to the monetary union and the banks of the core. Exit is not easy. It is technically easy in some respects. It's fiendishly difficult in others. It's not an easy option, but I would argue, it's the only logical option if you consider the alternative, and the alternative I drew for you ten minutes before. The alternative is long-term stagnation. Exit would allow for a number of things. It would allow for the re-denomination of debt. You can turn the debt into drachmas and pay people in drachmas. Much cheaper. You can recapture competitiveness, because of course the new drachma will be devalued, and that will give a breath of effectiveness to industry, and you can protect the banks. There are three problems of exit. I haven't got time to go into it. Three massive problems. These problems must be kept separate, because if they go less, you will get a gigantic crisis. You must prevent the banking crisis, and for this you must nationalise the banks. Banks must be nationalised, no question. They must be put on the public property, and there must be a blanket guarantee of deposits to ensure that people can have their savings back. There is the risk of a monetary crisis, because, of course, there will be two currencies circulating for a period. There will be the euro and the new drachma, and that's not an easy thing, but it can be resolved. If the state perseveres, and if it insists in making payments in the new drachmas and receiving income in the new drachmas, the circulation will settle down after a period of time. Third, there will be a foreign exchange crisis. In the medium term, the change to the new currency will be good for industry, no question. In the very short term, it will be problematic. It will be problematic because it will not be easy to import oil, it will not be easy to import food, it will not be easy to import medicine, commodities in which Greece has got significant deficits. There will have to be administrative measures brought in, essentially a war economy for these three commodities. Essentially rationing, there will have to be extraordinary measures. I did not create this. It's the monetary union in Estonia. Effectively, Greece is facing emergency conditions. Now, there are two conditions for success. I'm very busy. There are two conditions for success in this. This is a very difficult option, but there are two conditions for success. There must be some technical preparation. Greece must not find itself in this predicament without any preparation. If it happened in a chaotic way, and there is every danger that it will, because, as I explained, the monetary union is pushing towards a breakup. If a country keeps resisting it and finds itself in this predicament without preparation, it will happen in the worst possible way. It will be like Argentina in 2001, where chaos prevailed. So some technical preparation must happen even now. I am sure, for instance, that the German government has already drafted a plan B for what would happen if Greece exited. I'm sure they've got it. Well, it's about time Greek authorities drafted a plan A. What would happen if they had to exit, instead of arguing that they would never exit? More fundamental than that is, of course, there must be social mobilisation and there must be political change. None of this would work without social mobilisation and political change. There must be a broad programme of social, political and economic transformation of the country, and that's what makes default an exit so appealing to my mind. It's the option, the opportunity of changing Greece and in that way giving a jolt to Europe. There must be a broad programme that would have, of course, capital controls, it would have redistribution, it would make the rich pay tax and it would bring back industrial policy. In other words, it would begin a policy of reorganising the productive structure to protect employment. In other words, it will deal a massive blow to neoliberalism and financialisation which have brought us to this past, which have created this situation. Default an exit, if prepared and organised in this way, if made into a plan and a programme could be the first decisive blow against this noose that has been strangling Europe and strangling much of the world for three decades and I put it to you that it's about time us who don't belong to the mainstream and don't belong to orthodox economics and so on, should start seriously to consider and plan for it. Thank you. Thanks very much, Costas. Now, George Irvin who's going to speak next is a professor here at SOAS in Development Studies and also the author of Super Rich, The Growth of Inequality in Britain and the US and he's going to give a slightly different perspective from Costas and he's going to be even more disciplined in his timing of his bit. If the projector, if it's possible if we could raise it a little bit very helpful down here but if not never mind, George. Costas has given me a difficult task because in a sense I'm meant to be here to defend the euro and really I agree with most of what Costas says. So let me see if I can pick a few points out. I do think the IMF report is excellent. It really is worth reading presumably there are copies available for anyone who wants one. It's very good research revealing the structural nature of the euro problem and as Costas has said, this is not a crisis about profligate states so-called club-med countries which exercise no discipline on their populations. I've spoken here before and I've been through the statistics on the fact that Greece is actually quite poor, the fact that its citizens work long hours, the longest in the EU and so on. So I'm not going to repeat any of that. I do agree with Costas particularly on the question of trade imbalance within the EU which is fundamental to understanding the nature of the project and what has happened really the neoliberal nature of the project. But I question the conclusion which appears to be that there's only one way out and that is to ditch the euro altogether. I'm not sure the title says breaking up a route out of a route out. I'm not sure whether the breaking up is the route out of the euro zone crisis or whether we're still looking for a route out of the crisis. So I don't agree with the conclusion that the euro is not worth saving. I'm a bit worried about the Costas' notion of the ECB as unable to act as a lender of the last resort. As a lender to government. Admittedly there is not yet in European government and if there is one it's going to be far different from the one envisaged by some of us 10 or 15 years ago. Nevertheless the ECB could have acted as a big bazooka rather than as a small pea shooter which is what it's arguably what it's been so far. Or even that. My main worry I was going to talk about three scenarios but I'll cut it right down and I'm not even going to use my PowerPoint to try to get through it quickly. My main worry is that total collapse of the euro could be triggered by a number of things and the cost of total collapse is potentially very high. It's not just the exit of Greece. I sometimes wonder whether the Germans aren't keen to keep Greece out possibly my next march by organising, as you say, a lender led default. If you take the problem of Italy Italy not only has 400 billion euro to be refinanced over the next year and a half but markets holds something like 2 trillion euro worth of Italian bonds. Now the way markets are going at the moment we're looking at a slow credit squeeze which is actually speeding up. Markets are looking to actually dump their sovereigns and if they start dumping Italian bonds they potentially could dump 2 trillion. Now that would be the end of the eurozone quite clearly. Except, well, take another scenario. UBS has estimated that the collapse of the eurozone could lead to a drop in eurozone GDP of 25% of GDP in the stronger states and 50% in the weaker states in the first year alone and probably half those numbers in the second and third year. So the cost is potentially very high and the problem is we have no way of predicting really what the cost will be. Whether through a collapse of private banks whether through a default of a particular country whether through simply the stupidity of the present leadership of the European Union, the dominoes will start to topple. What we do know is if the dominoes start to topple seriously it will be extremely costly and I'm not talking money. I'm talking people's livelihoods, people's jobs. It's going to be a vast amount of unemployment. And politically we're not necessarily talking about a great blow struck against neoliberalism much as I'd like to believe that. Politically we're talking perhaps about a 1930 style outcome about stronger right wing about growing xenophobia. So one of the reasons we have to take this work seriously is because we're living in a world where those options are still open and they are very dangerous possibilities indeed. Let me rather than talk about total collapse just very quickly talk about muddling through neoliberal muddling through what you might call the nasty neoliberal current scenario the Mercosie scenario which as someone aptly said is a compromise but no solution. Compromise but not a solution. Absolutely. What Mercosie and Sarkozi are proposing is a long term stability and growth union for the 17 or 16th plus an entrenched debt break law that means every country in the eurozone would need to entrench the notion that budgets must be balanced every year. And various other things possibly the courts, the EU court will get special powers possibly at once but the key point is that this is meant to free the ECB to intervene a bit more actively. We've heard in the last couple of days statements from Draghi that are very contradictory but maybe that's what we should expect to hear until more progress is made. I suspect that the reason the eurozone leadership has dragged its feet for so long is basically quite simple to leave the private banking system enough space and time to deleverage and to reduce its exposure to sovereign debt. We've seen that in the case of Germany, we know it's happened, we've seen it somewhat less in the case of France, we've seen it in the case of Britain. Why has the Bank of England been injecting 30 billion worth of QE basically to give British banks the cash reserves they need to weather a major crisis in the eurozone? What's Cameron been doing in Brussels? Well, we all know. Cameron has been defending the interests of the city. Pure and simple. Pure and simple. Sorry, Paul. I don't want to repeat what you're going to say. Let me come to what I call the alternative nice social democratic scenario. I treat it as an alternative scenario, at least theoretically. How far one can actually believe it is really a question of judgement. But in 2012 and 2013 there are two elections. One in France, as you know, the French presidential election and one in general election in Germany. It's likely that in both cases in France the PS will be returned to power and it's likely that in Germany we'll get an SPD-chun coalition. If that happens, one would be in a different position. In principle, a number of things could be done. There could be a large-scale debt moratorium of say at least three or four years together with restructuring, which is not just a creditor restructuring, but which is negotiated democratically with each country. We could see a reversal of the austerity measures which are leading to contraction and growing deficits and a move towards the sort of growth which is needed. I listened to a speech by François Ronde the PS in France earlier today in which he said this very explicitly, austerity, further contraction can only lead to growing seriousness of the debt problem. We need to reverse that. We need growth policies. It could lead to the ECB being used as big bazooka and as someone said, the ECB not only has access to serious money, some people have put it as high as 3 trillion, but it can also monetize it can print euros. There is no evidence that printing a couple of trillion euros is going to lead to hyperinflation. It's only right wing Germans who believe that and they believe it is a good excuse, citing the 1922-23 hyperinflation which happened under totally different circumstances. I won't go on too far except to say the other thing opened by the good social democratic option is the production of more public goods, the return to a more social vision of Europe. What some of us have always believed lies at the core of the European project. The eurozone can deliver collective goods which no country alone can deliver. It can strongly regulate and, if necessary, partly nationalize the financial sector. We need a major public presence in the financial sector, both in Europe and of course in Britain. We have one but we're not using it. It can impose an FTT now, that's in the news today. I won't go into it. Carbon tax, strong new energy policies, a whole set of policies which Europe has begun to move in the right direction on, but on which there's still a great deal more to be done. Perhaps most important of all, job creation. They know what that's about in the United States where they have high unemployment. They know what it's about even in rich Germany which has 10%, 9.5% unemployment and has had high unemployment for a long time. That reserve army of labour is there for a reason to keep down German wages. And as Costas has shown you, German real wages have been flat for a decade which is part of what the export-led growth model is about, which is perhaps the most critical feature. Let me end on one final thing. Which of these scenarios is likely to prevail? Will I leave it to you until the discussion? Perhaps it's pie in the sky to imagine that social democracy and new governments in France and Germany will change anything. We don't know. I fear that I'm being overly optimistic. The nasty scenario, the debt break scenario which Merkel wants to write into every constitution, every country in the eurozone's constitution will not work. It simply won't work as a contradiction in terms. Underneath the eurozone crisis is a balance payments crisis and Costas has already set out the way in which the German surplus reflects is mirrored by the deficit in the peripheral countries. Attempting to imitate Germany by saying each country must have a balanced budget makes no sense logically. The only reason Germany can have a balanced budget is because its external current account is balancing its domestic savings. With those two in balance, then the government sector savings balance can be retained. Sorry? Wrong microphone. No, no, need to wind up. Need to wind up. OK, one more. If all eurozone countries adopt a debt break, they can only adjust through a large fall in national income and a fall in employment. That fall will ultimately reduce the demand for German exports and will lead to the collapse of the model altogether. That, I think, is the central contradiction in the current model. And that's what I am doing. Thanks very much, George. Paul Mason, who, as I'm sure you'll all know, is the BBC's Newsnight Economics Editor and author of Meltdown, and I think he's got a book coming out soon called Why It's Kicking Off Everywhere is going to give us some insights from the front line. Paul, thanks very much. Thank you. I shall be scurrying off at 22 to be on Newsnight, so I won't be able to answer questions. But people who want me to answer questions, my personal email is paulmason60 at gmail.com. Happy to carry on the debate. And congratulations on the research. The previous report that RMF did into the German position in the eurozone I think was well in advance of the kind of research that comes onto my desk all the time and said effectively what it took bank and analysts in the mainstream of the city six months to realise you had said it first, and I'm sure this will also set an agenda. Incidentally, I would say about Cameron and last night, you know, look, you can have a political debate about defending the city versus other interests in the Britain, but it would be a rare mainstream politician who did not attempt to defend the national interest of their key economic sector, whether we like the fact that that is an economic sector in Britain, it will be a rare mainstream politician who simply said to another one of a different nationality, thank you very much, go ahead shaft our key economic sector, because that's the way they think about it. I mean, in that sense, I think what Cameron has realised is something that European left does not realise. That is the old world is over, it is collapsed. Last night, and we are now in a world of national exit routes from this crisis. Last night, the thing, it's up on the website, it says there will now be a 3% limit on 3% of GDP limit on national budget deficits, and a 0.5% GDP limit enforceable at the European Court of Justice on structural deficits. I don't know what hours is officially now, but Alistair Darling privately believed that Britain's was 6% of GDP when they left office. So what that means is that expansionary fiscal stimulus is no illegal. Counter cyclical fiscal policy is unlawful in the European Union. So sorry to European social democracy, but that means the central, what was left of European social democracy, and there was not a lot of it left, but what was left of it was the idea that, of course, welfare states, welfareism, bit of state spending can counteract a downturn. Well, that's now not possible. One Conservative MP, when I pointed this out, did email me and said, well, it would be possible if they had surpluses before the crisis, and that is true. So imagine how Europe develops a surplus big enough to do fiscal stimulus in the face of the next crisis, because we're facing 10 years of low or no or negative growth. So this is the bad situation for anybody who wants to do either deficit-funded expansion out of the crisis or social redistribution. It's not no possible. For all these reasons, I think it is highly likely we will now, after the event, have a debate in the European Union about whether this is such a great idea. But it is, of course, what Cameron, again, has managed to exempt Britain from. And again, whatever motive you ascribe to him, it's certainly Britain is the only country in Europe now. And crazily, there are nine non-EU countries that have signed up to this. Britain's the only country that doesn't have a legal limit on its ability to do deficit-funded expansion. And why am I obsessed with it? Because if you study the 30s, the only economies that escaped the 30s did deficit-funded expansion. Starting with Japan, followed by Germany, followed by to an extent Britain. Right now, the only countries that are growing where employment is being kept under control are America, deficit-funded expansion, and China. If not deficit-funded expansion, then expansion funded by unlimited monetary resources. So this should explain to you the apocal nature of what happened last night. It's Maastricht, but this time it's serious. It is... Because if you add to this, we have got a deflationary central bank, a bank which institutionally, of all the central banks in the world, is the only one that is institutionally deflationary. Added to this now, pro-cyclical policy now enshrined in law. You have got Hoover and Mellon. That is what you have got. All right, it's taken three years into the crisis to get it. Europe now has a transnational regime akin to the one that Hoover and Mellon applied to the United States in 1930. But we have not yet had our bank run. Let's just see what happens. What I'm saying here is effectively this. Let's talk about the detail of last night. What are they trying to do now? I think the ECB's move the day before was very significant. That is, with the Federal Reserve backing, unlimited dollar availability into Europe, the ECB now removing all conditions for central banks to prop up their national banking systems. The view of people I speak to in the city, in the bond market, people in charge of several billions each, and I've been speaking to people today, is that that should save the European Banking System, i.e. a massive splurge of liquidity. If you believe the latest stress tests, the funding gap, the solvency problem, is about 114 billion. That is solvable, but of course we know what it's solvable by, deleveraging, which means not lending to businesses and people. That deleveraging will be focused into southern Europe and that means there's a huge downward pressure in addition to what we already have on growth in southern Europe. If you then add to it a legal requirement to do austerity even if you don't want it, most of the governments too have been imposed, non-democratically elected, but most of them, the Spanish version of it, which takes office next week, wants to do this, but whether you want it or not, austerity, the very same guys in the bond markets who are saying to me it will save the banks and also saying it is highly likely to create a sovereign debt fiasco. That's the problem. That is the technical problem. Believe me, most of the people are neoliberals. The critique of this is not confined to people who don't like neoliberalism, and I think it's just worth bearing in mind for those of you and in my various leaflets as I come in, is that in actual fact, the only puzzling thing in the minds of many of these bond guys and the clever and savvy Hayekian economists is why don't the left get any of this? Why don't they understand that they might be part of a solution that is actually non-traditional but by no means confined to the far reaches of left politics? So what is the solution and what isn't it? The immediate problem we have is this, is that Italy and Spain together need about a trillion between now and mid 2014 of refinancing, new bond issuance and rollovers. It's about a trillion. The EFSF, if leveraged as planned last night, should be able to raise 700 of that. Then on top of that, 500 from the ESM, so that's new money we think, going into a new fund on top of what's already, so this has to go through parliaments, but we think they can get it, they've signed up for it. Central banks are going to lend, this is the new thing, the IMF money and the IMF will lend it back into the EU. I think that the capital economics today saying that could be up to 500 as well. So if you add that together you get to about 15, 1.5 trillion maybe, but we only need a trillion. That's the big if, because the big if is, what if they downgrade both all the European countries as they threaten to do and then they downgrade the EFSF? Then it can't do the leverage, then it can't get the, the basic building block is this 700 billion, that disappears. So this is what mainstream economists are now worried about, that the actual technical design is not possible because the fund thing can't work, it can't work because they can't borrow the money needed to do the lending. That's why everybody in Sirius, in London, in the market end of things, there is a big split in other words between politicians and markets here, right wing neoliberal politicians and markets is the markets only believe the ECB can do this. They believe the ECB has to do it because they believe technically this fund based solution is not going to be possible and then they also believe that with the, being Hyakians mainly, money is more money which you print is a safer bet than money which you borrow and then lend again. So by printing you put, you don't avoid who bears the social cost but you delay and what you do up front is you give an immediate answer and this is the problem. One bond trader sent out a very interesting little Venn diagram, it was so funny, it was two circles and it had solutions that will work in one circle and things acceptable to Germany in another circle but the Venn diagram never overlapped. That summed up the situation. Now as you point out, there is a way out of this that we shouldn't discount and that is that Europe's being social democracy comes to power. At that point it has the opportunity to change the treaty and in fact this is what the treaty people fear. This is why they want to get it done before anybody has a chance to vote for Sarkozy or the SPD. So that's where we are. The question of course then is can it save the euro? I think this is a short term question because we're in a banking crisis, we're in a credit crunch. There is large investors right now this week saying we're dumping all exposure to Spain and Italy. We're not waiting for standard and pause. We don't want to be the last people to do this. Just dumping exposure to public, to corporate, to private debt, that is what is going on. The American money has gone already. The whole thing has to be kept afloat through long term liquidity operations by central banks. Can it save the euro? Well if you get this combination of a short term bank, slow bank run, wholesale side bank run, which is happening now, with a very rapid cooling off of the European economy which is happening now and then a slow but significant cool off of the bricks, then basically you don't have to wait 10, 25% type falls in GDP. Incidentally I would caution against many of those because they're the shock doctrine figures. That's what they use to persuade you to do this. I'm not saying don't do it. I don't intervene in policy. I just say do it with your eyes open. The 10 and 25% falls are one thing but 3 to 5 to 8% falls are imminent in the situation if everything I've just said happens. Thanks very much, Paul. Our last contributor is Stathis Guvelakis who is a reader in political theory at King's and he's going to talk about the political dynamics of the European eurozone crisis. Stathis. Thank you. As Paul Mason said, the old world has collapsed. The change that is happening is of an apical nature. But I'm afraid that what is at stake here is much more than the possibility of just adopting counter-cyclical policies or returning to some form Okinesianism. I'm afraid that what is at stake and the world which is collapsing is the world which began with the English Revolution, went through the American Revolution and continued with the French Revolution. Because all these three revolutions, I'm not mistaken, were first and foremost about the right of national representative bodies to decide on budgets, to decide on taxations and to decide on fundamental options of economic policy facing the despotic and tyrannical powers of that time. Now it's quite clear that we can criticize, of course, in all kinds of ways the limitations and shortcomings of that form of democracy. But we are now in a situation where on the verge of losing even that minimal level of democracy we better, I think, understand its value. The much missed by me, colleague and comrade Peter Gowan, coined a marvellous expression about Europe which is the Hayek jacking of Europe or the European Union as the Hayek jacking of the European idea, if you prefer. Friedrich von Hayek, as you know, is the key theoretician of pure neoliberalism for a very long time, for most of his life probably, considered as a totally marginal and ultra-radical figure. But this is one of the rare cases where such radicalism has been fully vindicated by the course of events, as you probably know, because his ideas, which were considered as totally bizarre and eccentric for 40 kates, finally triumphed in the 1980s with Thatcher and Reagan. The European Union is the realisation, has been the infrastructure and the institutional structure of this type of project because, as Hayek very aptly, very lucidly thought, national states, notions of popular sovereignty, national parliaments, social compromises which have come as a kind of outcome of the social and political dynamics of modern politics were insuperable obstacles to the implementation of the neoliberal project with the destruction of social welfare and the social state being at its very centre. So that's what is at stake very deeply. That's really the core of the battle. So what we are witnessing now, I think, is the institutionalisation of this democratic collapse, the institutionalisation of the state of emergency which, as Naomi Klein has very nicely shown, always goes together with shock therapies and the shock doctrine. Costas's work is indispensable for understanding the political economy behind this. And very, very quickly, I want to sum up three of the main ideas and their political significance. The first and absolutely fundamental and for a non-economist like myself, this is what is absolutely striking, even in the previous reports, is the way he shows that dynamics of polarization of uneven development are absolutely structural and inherent to the way the European Union and the eurozone more specifically work and have been from the outset designed to work. Instead of having this myth and supposedly aim of the European Union which is the convergence into a commonly shared prosperity, etc., what we have in effect is an increasing polarization between the euro periphery and the euro core. What we do have is not at all the kind of, you know, gradual disappearance of the national dimension of economies and of capitalist formations but, on the contrary, new relations of dominations and new forms of hierarchies and new ways of imposing those hierarchies emerging from the internal dynamics of the eurozone. And this can be perfectly transposed on the level of the ideology and of politics. The new forms of nationalism, of racist stereotypes which have been elaborated, for instance, vis-à-vis the Greeks as the lazy, etc., these are not just a revival of old ideas and of old stereotypes. They draw from that material, of course, but they are the internal, the indigenous outcome of the dynamics of this European Union and of this specific eurozone. They are not a thing of the past. They are the product of the present. The second thing is austerity. Of course, emphasising the social dimension of austerity, the social interests which are behind austerity is not original. What is perhaps more indispensable is the way these austerity politics interrelate and interact with this dynamic of polarization and of unevenness in the development between national capitalist formations and the way those hierarchies and dominations are imposed via the institutional mechanisms the European Union has produced which prove to be much harder than those elaborated by the International Monetary Fund, for instance, for other types of countries in the past. Greece is, in that respect, a laboratory and we can see that politically speaking with what's happening in Italy. Bankers have taken power overtly now. Any notion of democracy has been absolutely ridiculed and these forms of bloodless coup have been elaborated in a very decisive way at the very top, at the very heart of the European institutions themselves. I must point very quickly, Costas and his collaborators of the RMF group in this last report show in a very clear way the structural limits of the European Central Bank itself and they dispel all the current illusions I think about the possibilities of the European Central Bank to intervene and to solve the problem. This is because the European Central Bank is not the bank of a single state and the problem is not only that it is a plurality of state but it is a plurality of state with contradictory interests and those contradictory interests are not just residual, they are produced by the internal dynamics of that very structure. It is absolutely impossible to imagine some arrangement which would allow the strongest, the winners to pay and to back up the losers of the country. What is happening is that exactly they are extorting and extracting as much wealth as they can via the mechanism of the debt and via the various memoranda and the other measures voted by the European Union. The political importance and meaning of this research and this work appears also clearly because it doesn't stop in the analytical part. It goes into the direction of proposing an alternative policy and I think that what Costas and his collaborators are doing here is absolutely indispensable for any serious critical thinking and about an alternative agenda because what in a nutshell they say is that you can't have a progressive, socially acceptable, democratically acceptable and viable solution to the crisis without a clash and a frontal confrontation with the European Union and the very mechanisms of that, what has become an absolutely monstrous institutional form. I think that we really have to say that for me the second time in modern times since the 1930s that most of the ruling classes of this continent have decided to go ahead in a way which represents a break with a very idea of democratic liberal institutions. The reason now that this sounds for problematic for many is the enormous gap between this and the state of the progressive and left-wing forces in Europe and perhaps outside Europe in that respect. We should have, however, absolutely no illusions about the possibility of the so-called social democratic parties as they are to offer something different from the continuation of what's happening now. I've been following very closely because I leave part of the time in France on the campaign of Francois Hollande since the primaries of the Socialist within the Socialist Party he has committed himself to follow an austerity politics. Even his slogan is giving sense to austerity. His challenge to, I mean, the way he pushed Martin Obris, his challenger in the primaries of the Socialist Party was to commit, he wanted Martin Obris to commit herself to vote for the golden rule and to follow strictly all the recipes elaborated by the European Union. There is absolutely nothing to expect from that side. What, on the contrary, we have to expect and what we have in a way to wage on is, of course, the reaction of popular movements, the reaction of societies, the work which is being done by critical intellectuals. And I don't think this is a pessimistic conclusion. I read this afternoon an article by, a text by Oscar Lafontaine on the changing of Europe in which he discusses in a very detailed way the proposals of Costa and the RMF group. In a very sympathetic way he says how in a way they propose something concrete and they open up a whole series of questions, of course, and this is not done by something, someone who plays the card or being a revolutionary or et cetera. He's a person coming from social democracy, from a genuine social democratic left. This is an indication that the work of Costa and the RMF is not a lone voice, that it has a capacity to set a new agenda, provided, of course, that all sorts of political conditions are met, provided that the encounter between this type of intellectual work and the work which is done by activists, by social and political popular movements is made. Thank you.