My second lecture to the economics faculty of the Autonomous National University of Mexico (UNAM) was on Europe’s single currency zone. Has the euro worked in taking the economies in the Eurozone forward both in improved living standards for the people within the area and also in integrating and converging each national economy into one effective capitalist unit? The euro
It’s a subject that interests Mexicans, as Mexico is part of the only effective free trade area in the Americas, the North American Free Trade Area (Mexico, US, Canada) – NAFTA, which is now under threat from US President Trump’s protectionist program.
In my presentation, I argued that this European project which started after the WWII, had two aims: first, to ensure that there were never any more devastating wars between European nations; and second, to make Europe into an economic and political entity that could rival America and Japan in global capital battle. This project was led by Franco-German capital, and with the introduction of the euro, the project eventually went further than just a free trade area or even a customs union (with free movement of capital and labour), to a single currency and monetary policy. The aim was to integrate all European capitalist economies into one unit to compete with the US and Asia in world capitalism with a rival currency to the dollar.
There are three views on the success of the European Union and the single currency. The mainstream neoclassical view is that an Optimal Currency Area (OCA), where all members benefit from a single currency and monetary policy, is possible as long as economies move through similar business cycles. If they don’t, then the market must be allowed to adjust wages and prices between national economies to bring about a new balance. Equilibrium can be established if there is wage flexibility and labour mobility in the currency area. And ideally there is also a common fiscal and monetary policy to adjust taxes and interest rates as necessary.
When the EU began, the EU Commission economists optimistically reckoned that, with higher trade integration, there would be increased synchronization of national business cycles. That’s because trade among EU economies is typically intra-industry and so does not lead to higher specialization, which could cause increased possibility of ‘asymmetric shocks’ ie differing business cycles.
But this neoclassical view of mobility of labour and wage flexibility was disputed by Keynesian theory. In the 1990s, Nobel prize winner Paul Krugman, who specialised in international trade theory, argued that higher trade integration would lead to higher specialisation of industry. That would lead to a concentration of industrial activity in just a few states. So far from convergence within the trade area between national economies, there was risk of divergence on productivity, wages and investment.
The Marxist view starts from the opposite position of the neoclassical mainstream. There is no tendency to equilibrium in trade and production cycles under capitalism. So fiscal, wage or price adjustments by the market (or even government) will not restore equilibrium. Capitalism is an economic system that combines labour and trade, but unevenly. The centripetal forces of combined accumulation and trade are countered by centrifugal forces of uneven development.
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 (first proposed by the classical early 19th century economist, David Ricardo) 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.
In contrast, the Marxist theory of international trade is based on the law of value. In the Eurozone, Germany has a higher technology ratio (organic composition of capital) than Italy. Thus in any trade between the two, value is transferred from Italy to Germany. But Italy cannot compensate for this by increasing the scale of its production/export to Germany, unlike say China. So it transfers value to Germany and runs a permanent deficit on total trade with Germany. In this situation, Germany gains within the Eurozone at the expense of Italy. As nearly all other member states cannot scale up their production to surpass Germany, unequal exchange is compounded across the EMU.
Balance of trade between Germany and Italy (Euro m)
With a single currency, the value differentials between the weaker states (lower OCC) and the stronger (higher OCC) are exposed with no option to compensate by devaluation of any national currency or protectionist measures. The weaker capitalist economies (in southern Europe) within the euro area eventually lost ground to the stronger (in the north).
Change in productivity levels since 1999 relative to Eurozone average (%)
The move to a common market and a customs union was a relative success in raising trade for all and in converging productivity levels and growth rates. This was similar to where NAFTA is today. But when the EU moved to free movement of labour and capital in 1993, harmonising its trade and employment regulations and setting up political controls, convergence in Europe stopped and the stronger capitalist economies increased their share of the value created at weaker economies’ expense. This was a key point made by a participant at the UNAM session.
The EU leaders had set criteria for joining the euro, but these criteria were all monetary (interest rates and inflation) and fiscal (budget deficits and debt). There were no convergence criteria for productivity levels, GDP growth, investment or employment. That was because those were areas for the free movement of capital (and labour) and capitalist production for the market and not the province of interference or direction by the state. After all, the EU project is a capitalist one.
This growing divergence in incomes and production per head and in profitability of capital was exposed when the Eurozone economy entered the major slump and debt crisis with the Great Recession of 2008-9. The global financial crash and the Great Recession were the result of Marx’s law of profitability, as I have argued ad nauseam elsewhere.
As Sergio Camara, Marxist economist at the Metropolitan University of Mexico (UAM), said in his commentary on my presentation at the UNAM session, we must distinguish between the underlying trends in capitalism globally and specific features for Europe. Many Keynesians blame the euro for the euro crisis, but the crisis of the currency was really a crisis of capitalism in general. The global crisis of capitalism took a particular form in the Eurozone because of the currency union. The debts being built up by the south with the north were exposed in the crash and sparked the ‘euro crisis’, but only after the global financial crash.
The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. Net capital assets and liabilities within the Eurozone should have been in balance – but they were far from that.
The capitalist sectors of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead.
Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states. Thus the bailout programmes were combined with ‘austerity’ to make the people of the distressed states pay with cuts in welfare, pensions and real wages, and to repay (virtually in full) their creditors (the banks of France and Germany and the UK). The debt owed to the Franco-German banks was transferred to the EU state institutions and the IMF – in the case of Greece, probably in perpetuity.
It was the workers of the Baltic states and the distressed Eurozone states of Greece, Ireland, Cyprus, Spain, and Portugal who took the biggest hit. In these countries, real wages fell, unemployment rocketed, and hundreds of thousands have left their homelands to look for work somewhere else. That has enabled companies in those countries to sharply increase the rate of exploitation of their reduced workforce, although so far that has not been enough to restore profitability to levels before the Great Recession and thus sustain sufficiently high new investment for a sustained path of growth.
Keynesians blame the crisis in the Eurozone on the rigidity of the single-currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, Germany. They reckon that the weaker economies would have been better off leaving the euro and devaluing their currencies to reverse their trade and capital imbalances. But such policies would have been no better for the workers in those countries exiting the euro, possibly worse.
Keynesian policies would still mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates. Take Iceland, a tiny country outside the EU, let alone the Eurozone. It adopted the Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone. But it still meant a 40% decline in average real incomes in euro terms and nearly 20% in krona terms since 2007. Indeed, in 2015 Iceland’s real wages were still below where they were in 2005, ten years earlier, while real wages in the ‘distressed’ EMU states of Ireland and Portugal were more or less flat.
In the last 18 months, the Eurozone economies have made a modest economic recovery, after nearly ten years of depression. But profitability of capital in most EZ economies remains below where it was in 2007 (see graph below). Progress in raising the rate of exploitation has been considerable. But progress in devaluing and deleveraging the stock of capital and debt built up before has been slow and even being postponed by easy monetary policy from the European Central Bank. Given the current level of profitability, recovery may take too long before the world economy drops into another slump. Then all bets are off on the survival of the euro.