“There is no point in preserving a currency union if it comes at a cost of sabotaging economic growth and the broad welfare of the EU’s citizens”
Marshall Auerback is a fellow of Economists for Peace and Security at Levy Economics Instiute of Bar College.
This article was produced by Economy for All, a project of the Independent Media Institute.
The euro is “celebrating” its 20th anniversary this month, but they aren’t popping corks across the continent. Except, perhaps, with the notable exception of delusional Eurocrats such Jean-Claude Juncker, president of the European Commission, who argued: “The euro has become a symbol of unity, sovereignty and stability. It has delivered prosperity and protection to our citizens…”
Much of the continent is characterized by double-digit unemployment, rising inequality, political strife, and a virtual lost generation of youth, who have never experienced anything remotely approaching a robust, ebullient economy. Greed-based integration is giving the EU a bad name.
The worst thing about the Eurozone as a whole is the currency union itself. The euro reinforces structural inequalities between member states as well as between social groups within countries. It is also worth recalling that its creation was supposed to be an intermediate step toward the inevitable formation of a “United States of Europe” of a supranational fiscal authority—i.e., a federal union in which a central government for the whole of Europe becomes responsible for the economic stabilization and income redistribution for the whole of the EU, while the allocation of resources is left in the hands of the nation state governments. That is clearly a long ways away, given existing political tensions between the creditor nations of the Germanic north and the debtor southern periphery nations.
To quote Abraham Lincoln, “A house divided against itself cannot stand.” Nor can a currency union minus a real fiscal authority to go with it. Since the latter seems politically impossible against a backdrop of Brexit, yellow vest protests in France, and a governing coalition in Italy that openly toys with abandoning the euro, a more likely outcome is the breakup of the currency union. Or a model of integration that isn’t simultaneously an enrichment program for the investor class.
In an ideal world, the euro’s end would come via coordinated action: reintroducing national currencies and immediately requiring all tax and other public contractual obligations within the nation to be denominated in that currency so as to create immediate demand for those currencies. Much more likely, however, is that the dissolution will occur via disruptive crisis.
That the euro has survived for 20 years is not a sign that we are moving closer to the day of “an ever closer union”: the longstanding aspiration of the fathers of the modern-day European Union (originally started as the six-nation European Coal and Steel Community). Rather, it is a sign of democratic subversion, a technocracy run amok that has survived by depriving elected national parliaments of control over fiscal policy: taxation, spending, and the core economic policies of the nation state. The euro has been both the method and the cause of this democratic disenfranchisement, by design, not by accident.
How, you ask? Because by substituting national currencies with a supranational currency, the euro’s creation severed the link between state and money, and with it the flexibility to confront economic crises of the magnitude that have been experienced throughout the euro’s history (especially post-2008). It has therefore become an instrument of greed as it has facilitated a massive wealth transfer toward the top tier of European society, along with an evisceration of the social welfare state.
National parliaments remain therefore constrained because without a national currency, they lack the fiscal capacity to respond (and they also faced potential bankruptcy, much like an American state, which is a user, not an issuer of the dollar). Mario Draghi’s “whatever it takes” speech in July 2012 alleviated the solvency problem of the national bond markets of countries in the Eurozone (because the European Central Bank is the only entity that can create the euros needed to backstop the national bonds credibly). That, along with some alleviation of fiscal austerity, induced a modest cyclical recovery from 2015 to 2018.
But the recovery, such that it was, has proved ephemeral. The GDP growth of the European Union as a whole has flamed out and is now experiencing its lowest growth in four years. The trillions of euros mobilized during successive crises have largely been devoted toward covert bank bailouts, and recycling money to creditors, rather than assisting the vast army of unemployed. Greed. And while each successive crisis since the euro’s inception has hitherto been enough to avert the ultimate blow-up of the currency union, the poor economic baseline has remained constant.
In fact, economist Michael Burrage recently compared the economic performance of the 12 founder Eurozone members with 10 independent countries, which are comparable in terms of economic structure, labor institutions, and productivity. Surprise, surprise, the Eurozone countries rank at the bottom. It is worth reiterating that this is not a “European Union” problem, but a Eurozone problem because high unemployment caused by austerity policy is an enduring Eurozone (EZ) characteristic. Consider that countries such as Norway, Switzerland and even the UK, beset by Brexit woes, are outperforming the EZ countries, especially on the unemployment metric.
The underlying assumption of a common currency—namely, that it would lead to a convergence of the member countries’ production, employment, and trade structures—has been proven false. Other than the currency itself, the only commonality in the EZ has been poor economic growth in virtually the entire region. A “one size fits all” currency union doesn’t work. There is a multiplicity of challenges—private debt, unemployment, automation, education, worker productivity—that can only be resolved via more socially inclusive (i.e., generous) national/supranational development strategies. But that is within the purview of fiscal policy, which in turn is constrained by the existence of each country effectively “borrowing” in a “foreign currency,” which is de facto what the euro is, given the institutional separation between the state and the currency itself. So going back to national currencies seems a necessary first step.
Why not simply attempt to devalue the euro?
For one thing, relying on external boosts to growth via currency devaluation depends on the willingness of other trading partners to adopt growth strategies that will accommodate the resultant increased imports (highly problematic in today’s increasingly protectionist environment). Furthermore, during previous periods of relative euro weakness, the biggest beneficiary by far in the Eurozone has been Germany, as evidenced by the fact that the country has a current account surplus now a shade under 8 percent of GDP, which largely comprises the bulk of the European Union’s external trade surpluses with the rest of the world. The rest of the bloc, particularly the Mediterranean members, are still registering subpar growth and substantially higher levels of unemployment. So in the first instance, a euro devaluation helps Germany, not the European Union as a whole.
Furthermore, the common currency means a common monetary policy, which has amplified the strains of the Eurozone, rather than mitigating them. In the period leading up to the 2008 global crisis, inflation rates in the Mediterranean countries were higher, which meant that real interest rates were lower. Hence, cheap credit fueled asset bubbles in countries such as Greece, Spain, and Portugal, which in turn provided the illusion that they were “converging” with the northern European economies. By contrast, post-2008 European Central Bank (ECB) interest rates remained too high for too long for those now debt-laden periphery countries, and they therefore have suffered greater fall-out from the financial crisis than Germany.
The economist Servaas Storm has quantified the impact:
“During the pre-crisis years 1997-2007, membership of EMU was beneficial for all countries…except Germany and Italy. EMU-membership is estimated to have increased per capita real incomes in Greece, Portugal and Spain by 8-10%…Things change considerably after 2008, however. Being part of the Eurozone has depressed the real incomes in Greece by 16%, in Italy by 8%, in Portugal by 4% and in Spain by 8% compared to the counterfactual. In contrast, most Northern ‘core’ economies…benefited from their EMU membership, as their actual per capita income levels are estimated to be higher than in the counterfactual scenario ‘without Eurozone membership’. Germany stands out in this post-crisis period 2008-2014, with the average German having an actual income which is about 5% higher than the estimated (non-EMU) counterfactual.”
The ECB’s monetary policy initially fomented asset bubbles in the periphery and then exacerbated debt deflation when these bubbles burst. In seeking to mitigate the southern debt deflation post-2008, however, the resultant low interest rates fueled a boom in Germany. This largely explains why Berlin’s actual income is higher than the estimated counterfactual, which would have occurred had Germany still been using the deutschmark, as the ever-vigilant Bundesbank likely would have raised interest rates sooner and more aggressively.
Even with a common monetary policy, had the Eurozone members existed in a federal union comparable to Canada, or the United States, policymakers could have mitigated regional divergences via fiscal transfers or equalization payments. And the issue of intra-regional trade imbalances would also be a non-issue (nobody in the U.S. really cares, for example, whether New York runs a “trade deficit” with Texas because of the overriding existence of this federal union we call the “United States of America”).
But even though there is no common fiscal union, the European Monetary Union custodians have nonetheless imposed a fiscal austerity straitjacket as a precondition of euro membership (i.e., the perversely named “Stability and Growth Pact,” which has delivered minimal growth and lots of instability). So countries that “earn” membership in “Club Euro” get the worst of all possible worlds: Minimal capacity to bolster growth via aggressive fiscal policy, just fiscal austerity. Like joining a religion that offers Hell, but no Heaven, fiscal austerity exacerbates productivity differentials (less money for investment, education, social welfare, higher unemployment, etc.), and locks the slow growth countries into debt trap deflation and perpetual economic stagnation (see Greece, as Exhibit A). And no means of “inflating away” the debt domestically, because there is no “national printing press.”
Last, but not least, the champions of the monetary union, notably those in Berlin, continue to preach the destructive myth that increased competitiveness via “structural reforms” (which usually means the ability to fire workers more easily, and cut social welfare programs) will somehow enable the afflicted countries to match Germany’s economic dynamism.
However, as Storm points out, countries can’t compete if the composition of exports in each country is different: “Germany is strong in medium- and high-tech manufacturing, and this strength shows up in a strong export performance as well as a limited vulnerability to external shocks” (emphasis mine). The strong export performance is in part derived from the fact that high-end goods are not particularly dependent on the low labor costs to compete globally. By contrast, the periphery countries are generally locked into low- and medium-tech activities, many of which compete with China and are therefore much more subject to its competitive threat (Italy’s textile industry being a classic case in point).
The upshot is that what’s good for Germany is not so for Italy or France, and vice versa. What is required are distinct national industrial policies, aiming at accommodating and diversifying the existing trade structures of the Mediterranean countries in particular.
Sadly, the Eurozone makes no provision for this largely because of the Eurozone’s deficit phobia. As I have written before:
“There is a broader philosophic problem embodied in the pact. Implicit in the drive to create a ‘stability culture’ is the belief that public debt is invariably an evil, the consequences of which must be stopped at all costs. But as events of the past decade have clearly demonstrated, excessive private sector debt build-up, notably in Asia and the United States, has played a far more destabilizing role in the global economy than fiscal profligacy, which undercuts one of the main rationales for retaining the Stability Pact in its current form. If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years—going into debt that totals trillions of dollars in order to allow the government to retire its debt. Again it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less.”
There are very few instances of a controlled dissolution of a currency union and a concomitant re-establishment of national currencies. One recent example is what occurred after the breakup of the old Yugoslavian federation. Even though the re-establishment of national currencies occurred with minimal economic disruption, the dissolution did not come without cost, as many of the former members of the Yugoslavian federation engaged in a costly civil war. Shorn of Tito’s organizing genius, longstanding suppressed resentments (fostered in part by fiscal transfers from the wealthier regions to the poorer ones) erupted as the federation fell apart.
There’s no question that a coordinated dissolution among 27 different countries would be considerably more challenging. Consider what is happening now in the United Kingdom, where an ostensibly “friendly divorce” (aka “Brexit”) has been going on two years, has hitherto resolved nothing, and in the end, may still not occur, given the restrictions the UK Parliament is now placing on its negotiators. It is also worth remembering that the UK does not even share a common currency, as it retains the pound.
In the Eurozone itself, we would likely witness these same simmering resentments from the wealthier countries, which have long criticized the “Mediterranean scroungers.” Imagine what happens if the next eruption occurs in Italy, or France (with its “yellow vest” protests presaging trouble there). Greece or Cyprus are child’s play, by comparison.
In any conceivable outcome, benign or otherwise, there will almost certainly be widespread impositions of capital controls and bank holidays (to prevent runs on deposits), as well as recourse to industrial protection and government controls and supports to mitigate the resultant fall-out. To say nothing of endless international court challenges, given the widespread holding of euros by institutions across the globe.
But the alternative of the status quo is increasingly untenable, given the huge scale of youth unemployment, rising inequality, and the growing numbers disenfranchised, marginalized, impoverished, and dispossessed by this 20-year experiment in economic sadism. Less greed is needed for survival. If national currencies are to be re-established, this must come with the reclamation of a nation state more committed to genuine popular sovereignty, more democratic, less oligarchical control over the economy, full employment, and a robust network of social welfare provision.
We’ve had far too many examples of the alternatives to contemplate over the course of European history. “An ever closer union” is a worthy aspiration, but it should not be focused on one Brussels-based government, obsessing about fiscal austerity, budget discipline and focusing its priorities on safeguarding its banks at the expense of the broader population. Ideally, a reformed European Union should find its fullest manifestations via cooperative, yet independent sovereign nation states, grounded in the historically generous social welfare states that characterized the continent in the aftermath of World War II. The urgency reflected in Mario Draghi’s “whatever it takes” speech would have been more admirable if it had focused not on saving the euro at all costs, but rather on establishing a full employment economy that benefits all European citizens, not just its financiers and oligarchs. There is no point in preserving a currency union if it comes at a cost of sabotaging economic growth and the broad welfare of the EU’s citizens. Likewise the power of the nation state’s fiscal policy should not be restricted, but freely deployed alongside of, or if necessary, substituting “the market,” to ensure that equitable prosperity is achieved for the many, not the few.