The euro: break or remake?

Kenneth Haar opens our debate about the future of the euro

December 12, 2011
11 min read

The European Union is facing the deepest crisis in its history. The exit of countries from the common currency is being openly discussed as Red Pepper goes to press, as is the idea of a eurozone made up only of the ‘core’ countries.

Until now, the defence of the euro has been the primary engine for integration. But it has become clear that the design of the common currency, in particular the way that it reinforces the imbalances between the core countries and the ‘periphery’, has played a key role in the crisis. Any plausible progressive way forward must address the fundamental flaws of the euro.

How should the left in Europe respond? By arguing for countries to leave the eurozone as a first step towards pan-European co-operation of a different kind, or to remake the rules of the eurozone on the basis of principles of solidarity and symmetry?

The obsession with austerity

First, to ask an obvious question: why does the EU have this obsession with austerity? Why is Europe being dragged down the risky road that could trigger a 1930s-like depression?

The EU/IMF loan packages are about saving the big banks, mostly German and French, that lent money by the truckload in the past, and are now in trouble. The financial markets have been demanding austerity before they will lower the interest rate on fresh loans to troubled economies. This in turn, is seen as a prerequisite for saving the euro – and saving the eurozone in its present form has been central to the interests of countries at the core of both the EU and the eurozone (Germany, France and maybe Finland and the Netherlands). These countries have benefited from the common currency, and are prepared to fight hard to preserve it on its present basis.

The real crisis

Here’s the problem. The crisis does not come from public debt but from private debt. Most of the countries (including Ireland and Spain) were regarded as safe and sound before the financial crisis, and both were in compliance with the Stability and Growth Pact. Where it appears to be a public debt crisis, it’s mainly because governments have taken on the huge debts of banks.

An indispensable key to understanding the crisis is to see how unfettered competition in the eurozone left Ireland, Portugal, Spain, Greece and Italy as the losers. Before the common currency, a weakness in competitiveness could be met with devaluation. Without that tool, the ‘periphery’ of the eurozone has steadily lost ground in terms of balance-of-trade and balance-of-payments – pushed by, among other things, stagnant and low real wages in Germany. The ensuing imbalance is clearly illustrated in the European Commission’s statistics of ‘competitveness’, measured in the nominal labour cost per unit.

When the private sector in these countries started losing ground to transnational corporations from Germany, the Netherlands, Finland and other countries, governments could do little to remedy the situation. The rules of the economic and monetary union preclude massive public investment, and the common currency made it impossible to use devaluation to make local products cheaper and regain competitive edge. With real wages stagnant in Germany, and price hikes in the periphery putting an upward pressure on nominal wages (not real wages, they hardly changed), the private sector turned to borrowing. This led to credit-driven growth that came to an abrupt end with the financial crisis in 2008.

The break-up scenario

Against this background there are two roads that could be followed, leading to either a break-up or a consolidation of the common currency.

Economically speaking, those who argue for a break-up of the euro have a couple of good cards in their hands. In a break-up scenario, the imbalances would be partially overcome if a group of countries decided to leave the eurozone entirely and return to their old currencies. This would enable them to devalue and possibly catch up economically.

Of course, adherents to this position would have to provide a model of an orderly break-up. There are important precedents that could encourage this option. When Argentina defaulted in 2002, it dropped the peg to the dollar that had produced the same effect as the euro has for the eurozone periphery in terms of the erosion of competitiveness of its industry. Argentina managed to negotiate its debt down by 50 per cent, and in the years before the global crisis in 2008, its economy grew by 58 per cent.

If this option is chosen, it would dampen the pace of the present form of neoliberal European integration. The eurozone would either be smaller or disappear altogether; the prospect of a European state would be pushed into the future; and many key social struggles would have national politics as their decisive battleground. If this strategy is pursued – or indeed if the euro collapses – it would not stop European integration as we know it but brakes would be put on it. The present drive to have common rules of economic governance at the European level to drive down wages and social expenditure via undemocratic procedures in Brussels would be aborted, and instead it would be up to social movements to gain terrain at the national level.

This would leave many problems unresolved, of course. In itself it would do little to drive back neoliberalism or the power of transnational and financial corporations. The question is how to build a progressive new Europe in the context of a breakdown of the old model. There are both dangers and opportunities.

With the euro

As for those who prefer a strategy in which the euro is retained, the first step is easily identified. The Stability and Growth Pact would have to be loosened, either by adjusting the threshold levels for debt and deficit or by making the rules of enforcement more flexible. But in all cases two problems would have to be addressed.

The first is the imbalance between core and periphery. In the course of the debate on the crisis, a number of proposals have been made that could take some pressure off the countries in the periphery of the eurozone. These include eurobonds. Such bonds would make lending cheaper, but they would do nothing to address the underlying imbalances. That could only be done by ensuring transfers from the core states, such as Germany and Finland – as when the dollar was backed by a federal US state that transferred money to the poorest states.

To give an impression of what would be needed, one expert estimate suggests that the EU would have to have 5-10 per cent of GDP at its disposal annually to deal with asymmetries like the one we see at the moment (Lord Skidelsky, EU Observer, 13 December 2010): ‘The euro was constructed in a way that benefited an export-led economy like Germany, but not everyone else. They have repressed wages to create room for exports, which then chokes off growth paths for other eurozone countries, who can’t readily increase their exports to Germany . . . If the euro is to survive, it has to develop a central treasury with a budget of five to 10 percent of GDP capable of dealing with asymmetric shocks, such as they have in federal systems like the USA . . . Logically, you will have to start all over again with a better design.’

The second and related problem is that a currency union has to be backed by a common fiscal and economic policy. A common currency is a common economic destiny. Decisions made by some will affect others – for example, budgetary decisions may affect inflation or in another way influence the common currency. Gaps between the standing of different economies may lead to attacks by speculators on financial markets.

So, a common currency requires a common policy, and if that policy is to be even remotely social, a strong European democracy would be essential. That, in turn, would require a massive makeover of the European institutions that over the past two decades have been shaped to impose neoliberal formulae in an authoritarian manner and ignore or sideline public debate.

The Euromemorandum (see below) outlines the kinds of radical changes that would be needed to meet the aspirations of the growing social movements and the public at large. A new kind of European integration through new democratic institutions cannot, however, be easily built on the back of the present architecture and the present political framework, the EU Treaty.

The spectre in Europe

Any strategy would be haunted by the spectre of right-wing nationalism. One question to consider is whether the break-up of the euro, or an exit of a group of countries, might be an attractive development to promote chauvinistic politics, and if this could even become the issue that the extreme right could rally people around. Indeed, in France this seems to be happening already.

The adherents to a euro-friendly strategy face a dilemma too. For years to come, people in a large part of the EU will come to know the union as something from which they get nothing but anti-social diktats. That is bound to spark a strong reaction, and if progressives are in any way seen as defenders of an undemocratic monster, the extreme right will be the ones to pick up the anger.

On the positive side, the protests have hitherto been led by progressive forces. Building on the protests in Greece, Spain, Italy and Portugal, a European progressive alternative – and one that would sideline the right-wing populists – could be within reach.

Kenneth Haar is a researcher with Corporate Europe Observatory. He writes here in a personal capacity


Europe’s left alternative

The EuroMemo group (Economists for an Alternative Economic Policy in Europe) coordinates an impressive network of socialist and other progressive economists across Europe. It has been in the forefront of the debate about the crisis in the eurozone and in arguing for a radical change in the economic policy pursued by European Union governments.

Unlike many on the left, the group refuses to be restricted to purely national policy options. It insists that in an era of globalisation it is essential that the 17 countries in the eurozone and the 27 wider EU states integrate their economic and social policies far more closely, not least to influence the future evolution of the global capitalist system.

In its latest annual report, EuroMemo confronts the current debt crisis head on and spells out some fundamental changes in policy that the labour movement and other progressive forces should fight for at a European level. Among the proposals are:

  • Cancellation of part of the debts of the poorer ‘peripheral’ EU countries, with decisions about which debts are legitimate to be determined by public debt audits of the type pioneered in Ecuador.
  • In all EU member states with debt above 60 per cent of GDP, a significant transfer of wealth should be achieved through a wealth tax. Larger private incomes of €250,000 and above should be taxed at a marginal rate of about 75 per cent.
  • Speculation on financial markets against weaker economies should be countered by the EU issuing ‘eurobonds’ guaranteed by all EU states.
  • The creation of a European finance ministry and a much expanded EU budget.
  • A ‘common fiscal policy’ to promote full employment rather than austerity.
  • A coordinated European wages policy, with wages rising at the rate of growth of productivity and an allowance for inflation.
  • A reduction in stages of the working week to 30 hours and a European minimum incomes policy.
  • A deliberate reduction in the size and influence of the financial sector.
  • Far greater regulation of the financial services sector and the introduction of a financial transaction tax and publicly owned ratings agencies.
  • Re-establishment of the essential role of public services, notably health services and early child care.
  • Institution of ‘public-citizen partnerships’ in place of ‘public-private partnerships’.

    This gives no more than a taste of a substantial and rich analysis of both the present crisis and the kind of European response the left should be fighting for. More information: www.euromemo.eu

    John Palmer

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