by Michael Roberts
In part two of my analysis of the euro currency, I consider the
impact of the global slump of 2008-9 and the ensuing euro debt crisis on
prospects for the euro.
The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. The
capitalist sectors of the richer economies like Germany stopped lending
directly to the weaker capitalist sectors in Greece and Slovenia, etc.
As a result, in order to maintain a single currency for all, the
official monetary authority, the ECB, and the national central banks had
to provide the loans instead. The Eurosystem’s ‘Target 2’ settlement
figures between the national central banks revealed this huge divergence
within the Eurozone.
The imposition of austerity measures by the Franco-German EU
leadership on the ‘distressed’ countries during the crisis was the
result of the ‘halfway house’ of euro criteria. There was no full
fiscal union (tax harmonisation and automatic transfer of revenues to
those national economies with deficits); there was no automatic
injection of credit to cover capital flight and trade deficits (federal
banking); and there was no banking union with EU-wide regulation and
weak banks could be helped by stronger ones. These conditions were the
norm in full federal unions like the United States or the United
Kingdom. Instead, in the Eurozone, everything had to be agreed by
tortuous negotiation among the Euro states.
In this halfway house, Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states. Thus any bailout programmes were combined with ‘austerity’ for those countries to
make the people of the distressed states pay with cuts in welfare,
pensions and real wages, and to repay (virtually in full) their
creditors (the banks of France and Germany and the UK). The debt owed
to the Franco-German banks was transferred to the EU state institutions
and the IMF – in the case of Greece, probably in perpetuity.
The ECB, the EU Commission, and the governments of the Eurozone
proclaimed that austerity was the only way Europe was to escape from the
Great Recession. Austerity in the public spending could force
convergence on fiscal accounts too (123118-euroeconomicanalyst-weekly).
But the real aim of austerity was to achieve a sharp fall in real wages
and cuts in corporate taxes and thus raise the share of profit and
profitability of capital. Indeed, after a decade of austerity, very
little progress has been achieved in meeting the fiscal targets
(particularly in reducing debt ratios); and, more important, in reducing
the imbalances within the Eurozone on labour costs or external trade to
make the weaker more ‘competitive’.
The adjusted wage share in national income, defined here as
compensation per employee as percentage of GDP at factor cost per person
employed, is the cost to the capitalist economy of employing the
workforce (wages and benefits) as a percentage of the new value created
each year. Every capitalist economy had managed to reduce labour’s share
of the new value created since 2009. Labour has been paying for this
crisis everywhere.
Reduction in labour’s share of new value added 2009-15 (%)
Source: AMECO, author’s calculations
The evidence shows that those EU states that got a quicker recovery
in their profitability of capital were able to recover from the euro
crisis (Germany, Netherlands, Ireland etc) faster, while those that did
not improve profitability stayed deep in depression (Greece).
One of the striking contributions to the fall in labour’s share of
new value has been from emigration. This was one of the OCA criteria
for convergence during crises and it has become an important contributor
in reducing costs for the capitalist sector in the larger economies
like Spain (and smaller ones like Ireland).
Before the crisis, Spain was the largest recipient of immigrants to its
workforce: from Latin America, Portugal, and North Africa. Now there is
net emigration even with these areas.
Keynesians blame the crisis in the Eurozone on the rigidity of the
single-currency area and on the strident ‘austerity’ policies of the
leaders of the Eurozone, like Germany. But the euro crisis is only
partly a result of the policies of austerity. Austerity was pursued,
not only by the EU institutions, but also by states outside the Eurozone
like the UK. Alternative Keynesian policies of fiscal stimulus and/or
devaluation where applied have done little to end the slump and still
made households suffer income losses. Austerity means a loss of jobs
and services and nominal and real income. Keynesian policies mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates.
Take Iceland, a tiny country outside the EU, let alone the Eurozone.
It adopted the Keynesian policy of devaluation of the currency, a
policy not available to the member states of the Eurozone. But it still
meant a 40% decline in average real incomes in euro terms and
nearly 20% in krona terms since 2007. Indeed, in 2015 Icelandic real
wages were still below where they were in 2005, ten years earlier, while
real wages in the ‘distressed’ EMU states of Ireland and Portugal have
recovered.
Iceland’s rate of profit plummeted from 2005 and eventually the
island’s property boom burst and along with it the banks collapsed in
2008–09. Devaluation of the currency started in 2008, but profitability
up to 2012 remained well under the peak level of 2004. Profitability of
capital in Iceland has now recovered but EMU distressed ‘austerity’
states, Portugal and Ireland, have actually done better and even Greek
profitability has shown some revival.
Net return on capital for Iceland and Greece (2005=100)
Source: AMECO
Those arguing for exiting the euro as a solution to the Eurozone
crisis hold that resorting to competitive devaluation would improve
exports, production, wages, and profits. But suppose Italy exits the
euro and reverts to the lira while Germany keeps the euro. Under the
assumption that there are international production prices, if Italy
produces with a lower technology level than that used by the German
producer, there is a loss of value from the Italian to the German
producer. Now if Italy devalues its currency by half, the German
importer can buy twice as much of Italy’s exports but the Italian
importers can still only buy the same (or less) amount of German
exports. Sure, in lira terms, there is no loss of profit, but in
international production value terms (euro), there is a loss. The fall
in the value rate of profit is hidden by the improvement in the money
(lira) rate of profit.
In sum, if Italy devalues its currency, its exporters may improve
their sales and their money rate of profit. Overall employment and
investments might also improve for a while. But there is a loss of
value inherent in competitive devaluation. Inflation of imported
consumption goods will lead to a fall in real wages. And the average
rate of profit will eventually worsen with the concomitant danger of a
domestic crisis in investment and production. Such are the consequences
of devaluation of the currency.
The political forces that wish to break with the euro or refuse to
join it have expanded electorally in many Eurozone countries. This
year’s EU elections could see ‘populist’ euro-sceptic parties take 25%
of the vote and hold the balance of power in some states like Austria,
Poland and Italy. And yet, the euro remains popular with the majority.
Indeed, sentiment has improved in 13 member states since they joined,
with double-digit bumps in Austria, Finland, Germany and Portugal. Even
in Italy, which has witnessed a roughly 25-point decline, around 60% of
people still favour sharing a currency with their neighbours. Greeks
are still 65% in favour. What this tells me is that working people in
even the weaker Eurozone states reckon ‘going it alone’ outside the EU
would be worse than being inside – and they are probably right.
Ultimately, whether the euro will survive in the next 20 years is a
political issue. Will the people of southern Europe continue to endure
more years of austerity, creating a whole ‘lost generation’ of
unemployed young people, as has already happened in? Actually, the
future of the euro will probably be decided not by the populists in the
weaker states but by the majority view of the strategists of capital in
the stronger economies. Will the governments of northern Europe
eventually decide to ditch the likes of Italy, Spain, Greece etc and
form a strong ‘NorEuro’ around Germany, Benelux and Poland? There is already an informal ‘Hanseatic league’ alliance being developed.
The EU leaders and strategists of capital need fast economic growth
to return soon or further political explosions are likely. But as we go
into 2019, the Eurozone economies are slowing down (as are the US and
the UK). it may not be too long before the world economy drops into
another slump. Then all bets are off on the survival of the euro.
If you have opinions about the subject matter of posts on this blog please share them. Do you have a story about how the system affects you at work school or home, or just in general? This is a place to share it.
Thursday, January 3, 2019
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