By Michael Roberts
January 1 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.
Optimal Currency Area
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.
Germany gains at the expense of Italy
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.
Weaker southern economies lost ground to the north
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.
January 8, 2019
For the original, with charts and references, go to:
https://thenextrecession.wordpress.com/2019/
