Apologies to Michael Roberts of the Next Recession blog for taking such a long quote, but many important points are made. It doesn’t include, however, his argument about why it is unwise to say that leaving the Euro is a workable solution and using the example of Argentina to illustrate how it works. For that you have to read the whole post.
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Greek capitalism has failed. So has capitalist production in the smaller Eurozone nations. Nothing demonstrates more the need for a pan-European economy to use all the resources of the continent, both material and human. The smaller and weaker capitalist economies have been driven into a long winter of depression by the global slump. The euro crisis is not really one of sovereign debt or a fiscal crisis. Its origin lies in the failure of capitalism, the huge banking and private credit crisis and the inability of undemocratic pan-European capitalist institutions like the European Commission, the Council of Ministers and the pathetic European parliament to deal with it.
The ambition of France and Germany to compete with the US and Asia on the world stage through monetary union was fundamentally flawed. The original dream of a united capitalist Europe, of free markets in production, labour and finance, ever utopian, has turned into a nightmare. Now the single currency union is under threat. It always was ambitious.
JP Morgan recently looked at whether the ‘right conditions’ under capitalism existed for setting up a currency union in Europe. They measured the difference between countries using data from the World Economic Forum’s Global Competitiveness Report, which ranks countries using over 100 variables, from labour markets to government institutions to property rights. They found that there’s an incredible amount of variation among the euro zone’s member nations. The biggest differences come in pay and productivity, the efficiency of the legal systems in settling disputes, anti-monopoly policies, government spending and the quality of scientific research.
Indeed, the euro zone countries are more different from each other than countries in just about any hypothetical currency union you could care to propose. A currency union for Central America would make more sense. A currency union in East Asia would make more sense. A currency union that involved reconstituting the old USSR or Ottoman Empire would make more sense. In sum “a currency union of all countries on Earth that happen to reside on the fifth parallel north of the Equator would make more sense.”
But the currency union went ahead because of the political ambitions of France and Germany to have a Europe led by them, even after British capitalism refused to join. Of course, the aim was to bring about a ‘convergence’ between the weaker and stronger economies. That dismally failed in the boom years of 2002-7. The Great Recession just exposed and widened the inequalities.
Can the existing currency union survive? Well yes, if economic growth returns big time or if German capitalism grasps the nettle and is prepared to pay to help the ailing smaller capitalist economies through fiscal transfers. It is no good the Germans saying they will do so if the likes of Greece, Portugal, Ireland, Spain etc “stick to fiscal targets”. They cannot. So Germany will have to decide on more transfers without more austerity.
And it won’t be cheap. The Cologne-based IW economic research institute reckoned that West Germans paid about $1.9 trillion over 20 years, partly via a “solidarity surcharge” on their income taxes, to help integrate and upgrade Eastern Germany. That was roughly two-thirds of West Germany’s GDP then. The subsidies helped cover East Germany’s budget shortfalls and poured money into its pension and social security systems. At the same time, nearly 2 million East Germans – a full one-eighth of the population – moved west to seek work. That is the sort of transfer of funds and jobs that will have to take place to save the currency union.
Currency unions cannot stay still – Europe’s has been around for only 13 years. Either they break up or they move onto full fiscal union where the revenues of the state are pooled, especially when crisis concentrates the minds. That means the smaller states agreeing to German control of their budgets in return for fiscal transfers and the Germans allowing proper fiscal transfers to the poorer ‘regions’ of the currency union.
Take the example of the UK. This is a government of four nations and many regions. Taxes are raised by a central state (although there has been some devolution to Scotland, Wales and Northern Ireland) and raising debt is mostly made by the central state (there are some local government bonds or loans). Wales is a poorer part of the UK. It runs a ‘trade deficit’ with the rich south-east of England. Its inhabitants contribute way less in tax revenue than they receive in government handouts. So Wales has twin deficits on its government and capitalist sectors, just as Greece has with the rest of the Eurozone.
But it is not an issue for Wales because it is part of the United Kingdom of Great Britain and Northern Ireland. Sometimes there are grumbles from the rich south that they have to pay for the unemployed Welsh but that argument does not have much traction. After all, the extreme logic of that is to say that the extremely rich inhabitants of Kensington in the posh part of London should not have their tax revenues redistributed to the poor inhabitants of east London. That would mean Kensington would have to break with the fiscal and currency union that is Britain, put up border controls and find their own government, armed forces and central bank. Of course, their riches would soon disappear because they are based on the labour of all the people in Britain and even more from abroad. It is a point that many nationalist elements in Germany and northern Europe forget. If the Eurozone breaks up into its constituent parts, the ongoing (not just immediate) losses to GDP for northern Europe would be considerable.
The example of the US also shows the advantages of a federal state over the commonwealth of states that existed to begin with. It took a civil war of bloody proportions to establish a unified state that wiped out the idea of secession for good. Now the US federal government raises taxes and debt and provides funds to the states (even though they raise their own taxes). A full financial union came later than fiscal union in the US, when the Federal Reserve Bank was set up by the large private banks after a series of banking collapses. Now dollars are redistributed through the federal reserve system to cover ‘deficits’ on trade and capital between states.
So what happens now to Europe’s currency union? In the absence of German capitalism bailing out the south with huge fiscal transfers, the only way that the peripheral countries have to restore growth and avoid the break-up of the EMU is by defaulting on the debt they have accumulated – in effect a forced fiscal transfer. Remember most of this debt is the result of the collapse of the banking system and the Great Recession. It is not due to ‘excessive ‘ spending by governments. The excessive debt was in the private sector: in mortgages and banking debt. That debt got transferred onto government books through bailouts and social benefits.
Read the rest here. For an older but equally accurate critique of the flaws in the Euro you could do worse than read Joseph Halevi’s 1995 paper, or indeed, this summary of it.
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May 11, 2012 12:47 am
On this subject here’s a very prescient article from Wynne Godley, which foresaw what form crisis would take all the way back at Maastricht. http://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that.
Also, with all the rhetoric about growth recently emanating from fiscally conservative quarters, get this vignette from Jacques Delors concerning the structure of the Growth & Stability Pact-
“I had proposed the coordination of economic policies in 1997, when I was no longer president of the European Commission but a simple French citizen. I had proposed this as a consequence of the 1987 Delors report. It was not taken up: instead, “growth” was simply added to “stability”. That is typically French, the French adore formal requirements. They returned home happy because “growth” had been mentioned. How irresponsible. Or what a fraud?”
Plus ca change..