Aug 11, 2016

The euro is breaking up Europe

by Erhard Crome, via Lexit Network

Review of Stefan Hinsch and Wilhelm Langthaler, Europa zerbricht am Euro. Unter deutscher Vorherrschaft in die Krise (‘The euro is breaking up Europe. Into crisis under German sway’). Promedia Verlag, Vienna, 2016, 204 pp.

Although the title refers to Europe, this work is essentially about the European Union, its crisis and the probable unhappy outcome, the “collapse of a historic project”. The volume contains profound analyses of the economic and monetary processes that led to this situation but also valuable historical, political and sociological exposés which make the background and the general context easily comprehensible.
The authors’ fundamental finding is that in the EU we have an ‘imperfect monetary union’. As long as each EU Member State had its own separate currency, the others, though under pressure from Germany’s exporting power, the deutschmark and the interest policy of the Bundesbank, could ease that pressure by means of monetary adjustments, devaluations and interest-rate changes and could avail themselves of compensatory mechanisms. With the irrevocable fixing of euro exchange rates for the participating currencies on 1 January 1999, the creation of the European Central Bank and the adoption of the Stability and Growth Pact, the individual countries lost these instruments. The ‘EU convergence criteria’ prescribed fiscal and monetary performance targets but essentially disregarded productivity growth. The only way in which countries that are now caught in the euro trap can offset competitive disadvantages – provided that they exercise budgetary discipline – is by engaging in ‘internal devaluation’, in other words lowering prices, which is not really feasible, and cutting wages and salaries, welfare benefits and pensions – the programme implemented in Greece, Ireland and Portugal in the name of ‘debt reduction’.
This is what is meant by the term ‘imperfect monetary union’, and it is also the crucial difference between the EU and the United States. Italy’s Mezzogiorno and the territory of the former GDR in Germany are compelled to accept their marginalisation. Here, as in the United States, there are Union-wide balancing mechanisms. As the authors state, “The marginalisation of an entire European state arouses lasting political opposition. Greece cannot be abandoned like a Swiss mountain village; the situation calls for a total overhaul of the prevailing political conditions. After all, the competitive countries in the heart of Europe have the opposite problem, for they have to agree to wealth transfers that make a marginal existence bearable”. A common currency ultimately requires “a common socio-economic regime, a common state” that controls the tax and welfare system.
At this point the German problem takes centre stage. Germany is the main beneficiary of the euro. Globalisation sharpened Germany’s competitive edge, and the imbalance between wage and productivity growth enhanced it still further. “The southern part of the eurozone, including France, had already been left trailing behind the German core by 2007.” From 2003 to 2007, the German current-account surplus rose to 7% of gross domestic product (GDP), particularly as a result of increased export earnings; in 2014, having recovered from the crisis, it stood at 7.6%, or 220 billion euros. The euro, however, requires political compromise. The exit of smaller countries on the outer periphery, such as Greece or Portugal, could be withstood economically if there were no alternative; at worst, claims would have to be written off. The political impact, however, would be devastating and could spread to Spain or Italy. If Germany wants to keep these countries in the currency union, it must make concessions, such as toning down its austerity policy and its ‘obsession with stability’ and taking pump-priming measures at home, such as allowing steeper pay increases and assuming liability. When Germany approved the euro, however, any assumption of liability was ruled out as a matter of principle, and a ‘fiscal transfer union’ was rejected. The German Federal Government is clinging to excessively harsh austerity measures, an unwillingness to cancel debts and assume liability and resistance to an expansive monetary policy.
In such conditions, it is not possibly to end the austerity policy in the present power and property structure. “This means that there is currently no option left which would be both realistic and painless. A social Europe that would begin with a reshaping of the development model in the strong central countries, that would balance competitiveness and help to close the global demand gap is a non-starter for political reasons, being blocked by the elite groups, especially in Germany. The continued existence of monetary union in a context of continuing austerity implies a chronic deflationary crisis as well as increasing dependence on external factors for economic growth; for southern Europe in particular, it offers the prospect of more marginalisation and less democracy.” In Greece, the latter phenomenon is being illustrated at the present time by the debt-restructuring regime and the Troika.
Against this backdrop, Hinsch and Langthaler come to the conclusion that “There is no painless option for southern Europe, but withdrawal from the euro area is the least painful”. This, however, would mean that “a partial or indeed complete break-up of monetary union and, as a consequence, of the EU in its drive to supranationality would have a huge impact with unforeseeable implications for Europe and the world. In economic terms it would bring about a revaluation crisis in Germany. Export surpluses would plummet, and the sharp drop in sales would trigger a severe recession. This would be the fault of those German ‘elite’ groups which are now blocking any other policy. “Everything points to the fact that Berlin is overplaying its hand”. Germany would thus have brought about the collapse of Europe for the third time, having been strong enough to block a change for the better but too weak and incapable to take decisive trailblazing action. The EU was built round the “Franco-German axis”. If the euro fails and the EU crumbles, that axis will split too. Then the ‘German question’ will be back on the European agenda with all of its original implications.
The authors’ core hypothesis is “that a powerful drive for a return to national sovereignty is gathering momentum in the face of the supranational centralisation pursued by the Berlin-led capitalist elite, a drive that the elite groups in the peripheral countries cannot easily counteract”. The concepts of the nation and sovereignty of the people are essentially a legacy of the French Revolution and the Socialist workers’ movement. After the demise of the Soviet Union and the end of the Cold War, however, during Bill Clinton’s presidency, globalisation was celebrated as a development that “was to create a single, interlinked world” in place of nations and divisive nationalism. On the Left, Michael Hardt and Antonio Negri, in Empire (2000), adapted the concept of sovereignty to this new situation. The Europeanist ideology, in other words the belief that European unification in the form of the EU would grow into a stable peaceful order and ensure lasting peace and prosperity, was the European version of these new grand promises. “The magnetism of this idea can scarcely be overestimated, and its effects are still felt today. In some respects, Europeanism may be regarded as a European counterpart to the American Dream, deeply rooted in the historical Left and retraceable to Kant’s Perpetual Peace.” The linkage between Europeanism and neo-liberalism with its single market vanishes from sight. It is the pragmatic attempt of a defeated working class to come a step closer to the “supposed achievement of its historical objectives of national reconciliation, peace and democracy” and the hope of being able, at the end of the day, to “set the seal of social justice” on this achievement.
Against this backdrop, according to the authors, the Left today regards “the nation-state not only as antiquated but also as reactionary, as a relapse into the age of nationalism”. That, however, has implications. “The heirs of the historical Left certainly do not stand up for the social interests of either the lowest classes or those of workers any more; still less are they pursuing the aim of overcoming capitalism. Indeed, it might be inferred from their support for globalisation that the opposite is true. On the Right, things are more complex, because some of its schools of thought already have a history of concealing their desire to defend the interests of the social elite. What is described today as right-wing populism certainly does not represent the interests of elite groups but sets out to defend the interests of the lower classes against both elite groups and immigrants.”
Accordingly, with the “rebellion against the reluctant Imperator”, that is to say Berlin, the hour has struck for the rise of “EU-sceptical protest parties”, most of them on the Right. Although the United Kingdom does not belong to the euro area, Brexit has brought about an initial breakthrough towards a “return to national sovereignty”. In the wake of that event, this book is an even more riveting read.