Today is the 20th anniversary of the launch of the
euro and the Eurozone single currency area. Starting with eleven
members, two decades after its birth, membership has grown to 19
countries and the euro-area economy has swelled by 72% to 11.2 trillion
euros ($12.8 trillion), second only to that of the US and positioning
the European Union as a global force to be reckoned with.
The euro is now used daily by some 343 million Europeans. Outside
Europe, a number of other territories also use the euro as their
currency. And another 240 million people worldwide as of 2018 use
currencies pegged to the euro. The euro is the second largest reserve
currency as well as the second most traded currency in the world after
the dollar. As of August 2018, with more than €1.2 trillion in
circulation, the euro has one of the highest combined values of
banknotes and coins in circulation in the world, having surpassed the US
dollar.
That’s one measure of success. But it is not the most important
benchmark considered by its founders. The great European project that
started after the WW2 had two aims: first, it was to ensure that there
were never any more wars between European nations; and second, to make
Europe an economic and political entity that could rival America and
Japan in global capital. This project would be led by Franco-German
capital. The euro project went further and aimed at integrating all
European capitalist economies into one unit to compete with the US and
Asia in world capitalism within a single market and with a rival
currency to the dollar.
In part one, I’ll consider whether the euro has been a success for
capital in the participating states; and whether it has been good news
for labour. In part two, I’ll consider whether the euro will still be
here in another 20 years.
How do we measure the success of a single currency area in economic
terms? Mainstream economic theory starts with the concept of an Optimal
Currency Area (OCA). The essence of OCA theory is that trade
integration and a common currency will gradually lead to the convergence
of GDP per head and labour productivity among participants.
The OCA says it makes sense for national economies to share a common
monetary policy if they (1) have similarly timed business cycles and/or
(2) have in place economic ‘shock absorbers’ such as fiscal transfers,
labour mobility and flexible prices to adapt to any excessive
fluctuations in the cycle. If (1) is true, then a one-size-fits-all
monetary policy is possible. If (2) holds, then a national economy can
be on a different business cycle with the rest of the currency union and
still do okay inside it. Equilibrium can be established if there is
‘wage flexibility’, ‘labour mobility’ and automatic fiscal transfers.
The European Union has shown a degree of convergence. Common trade
rules and the free movement of labour and capital between countries in
the EU has led to ‘convergence’ among participants in the EU.
Convergence on productivity levels has been as strong as in fully
federal US, although convergence more or less stopped in the 1990s, once
the single currency union started to be implemented.
So the move to a common market, customs union and eventually the
political and economic structures of the EU has been a relative
success. The EU-12/15 from the 1980s to 1999 managed to achieve a
degree of harmonisation and convergence with the weaker capitalist
economies growing faster than the stronger (graph below shows growth per
capita 1986-99)..
But that was only up to the point of the start of EMU and
preparations for it in the 1990s. The evidence for convergence since
then has been much less convincing. On the contrary, the experience of
EMU has been divergence.
The idea that ‘free trade’ is beneficial to all countries and to all
classes is a ‘sacred tenet’ of mainstream economics. But it is a
fallacious proposition based on the theory of comparative advantage:
that if each country concentrated on producing goods or services where
it has a ‘comparative advantage’ over others, then all would benefit.
Trading between countries would balance and wages and employment would
be maximised. But this is empirically untrue. Countries run huge trade
deficits and surpluses for long periods; have recurring currency
crises; and workers lose jobs from competition from abroad without
getting new ones from more competitive sectors.
The Marxist theory of international trade is based on the law of
value. In the Eurozone, Germany has a higher organic composition of
capital (OCC) than Italy, because it’s technologically more advanced.
Thus in any trade between the two, value will be transferred from Italy
to Germany. Italy could compensate for this by increasing the scale of
its production/export to Germany to run a trade surplus with Germany.
This is what China does. But Italy is not large enough to do this. So
it transfers value to Germany and it still runs a deficit on total trade
with Germany.
In this situation, Germany gains within the Eurozone at the expense
of Italy. All other member states cannot scale up their production to
surpass Germany, so unequal exchange is compounded across the EMU. On
top of this, Germany runs a trade surplus with other states outside the
EMU, which it can use to invest more capital abroad into the EMU deficit
countries.
The Marxist theory of a currency union thus starts from the opposite
position of neoclassical mainstream OCA theory. Capitalism is an
economic system that combines labour and capital, but unevenly. The
centripetal forces of combined accumulation and trade are often more
than countered by the centrifugal forces of development and unequal
flows of value. There is no tendency to equilibrium in trade and
production cycles under capitalism. So fiscal, wage or price
adjustments will not restore equilibrium and anyway may have to be so
huge as to be socially impossible without breaking up the currency
union.
The EU leaders had set convergence criteria for joining the euro that
were only monetary (interest rates and inflation) and fiscal (budget
deficits and debt). There were no convergence criteria for productivity
levels, GDP growth, investment or employment. Why? Because those were
areas for the free movement of capital (and labour) and where capitalist
production must be kept free of interference or direction by the
state. After all, the EU project is a capitalist one.
This explains why the core countries of EMU diverged from the
periphery. With a single currency, the value differentials between the
weaker states (lower OCC) and the stronger (higher OCC) were exposed
with no option to compensate by the devaluation of any national currency
or by scaling up overall production. So the weaker capitalist
economies (in southern Europe) within the euro area lost ground to the
stronger (in the north). The graph below shows how each member state
has fared in growth relative to the Eurozone average.
Franco-German capital expanded into the south and east to take
advantage of cheap labour there, while exporting outside the euro area
with a relatively competitive currency. The weaker EMU states built up
trade deficits with the northern states and were flooded with northern
capital that created property and financial booms out of line with
growth in the productive sectors of the south.
Even so, none of this would have caused a crisis in the single
currency union had it not been for a significant change in global
capitalism: the sharp decline in the profitability of capital in the
major EU states (as elsewhere) after the end of the Golden Age of
post-war expansion. This led to fall in investment growth, productivity
and trade divergence. European capital, following the model of the
Anglo-Saxon economies, adopted neo-liberal policies: anti trade union
laws, deregulation of labour and financial markets, cuts in public
spending and corporate tax, free movement of capital and
privatisations. The aim was to boost profitability. This succeeded
somewhat for the more advanced EU states of the north, but less so for
the south.
Then came the global financial crash and the Great Recession. This exposed the fault-lines in the single currency area.
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Tuesday, January 1, 2019
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