By Marshall Auerback
This post first appeared on Truthdig
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 as 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: