The euro’s corona crisis

This coming Thursday 23 April there is a video conference meeting of the EU leaders to discuss once again what to do about the coronavirus pandemic and the ensuing lockdown of production across the area.  In particular, there is the vexed question of how to help out those EU members states like Italy and Spain that have been hit hardest by the pandemic.  (Here are the latest figures compiled by John Ross).

Last week, over three days and two nights of teleconference, the finance ministers of the Eurozone fumbled their way towards an emergency response to the Covid-19 pandemic. The PIGS (Portugal, Italy, Greece, Spain) aimed high with a demand that the Eurozone states share the burden of the crisis with a jointly issued debt instrument known as a coronabond. The FANGs (Finland, Austria, Netherlands, Germany) or ‘frugal four’ beat them back down, proposing that each member of the currency union bear its debts alone.

The Dutch finance minister Wopka Hoekstra played bad cop. He rejected a ‘mutual bond’ guaranteed by all states, arguing that it was Italy’s fault that it had such high public debt that it could not afford to pay for the pandemic itself.  He did not trust the ‘profligate’ spending ways of the likes of Italy. This echoed the Eurogroup’s callous stance against Greece during the so-called ‘euro debt crisis’ of 2012-15.

The southern states, backed by France, protested that the Dutch minister’s position stood against the whole idea of the European project, supposedly designed to bring warring European nations into one integrated and harmonious whole.  “We leave nobody behind,’ the European Commission president, Ursula von der Leyen, proclaimed in her opening speech to the EU parliament at the beginning of 2020. “We need to rediscover the power of co-operation,’ she told the World Economic Forum in Davos three months ago, ‘based on fairness and mutual respect. This is what I call “geopolitics of mutual interests”. This is what Europe stands for.’

These fine words turned to dust at the finance ministers meeting. In the end, the weak southern states capitulated to the ‘frugal four’, as they had no alternative. Mário Centeno, the Portuguese finance minister and current Mr Euro, brokered a late night compromise. ‘At the end of the day, or should I say, at the end of the third day,’ he announced, ‘what matters the most is that we rose to the challenge.’  

But the ‘compromise’ falls way short of helping Italian capitalism out of its mess.  The finance ministers agreed on a package of 500 billion euros to alleviate the crisis. An ESM credit line will be established (up to 240 billion euros), which, although only subject to minor conditionality, will be limited to covering “direct and indirect” health costs. But this credit line will probably not be used by Italy, already burdened by sky-high public sector debt (only surpassed by Greece).

There will be a EU programme to grant member states cheap loans without conditions to support short-time work, which is called SURE (Support to Mitigate Unemployment Risks in an Emergency). This will enable the EU to borrow on the markets and to pass on the funds to the member states. But this is just a short-term measure.  Furthermore, there will be loan guarantees from the European Investment Bank for companies.

And the ECB is now buying up government bonds on a large scale under the PEPP (“Pandemic Emergency Purchase Programme”). The PEPP program is thus currently ensuring that the Italian government can continue to refinance itself at very low cost during the corona crisis.

But all these are short-term measures or leave Italy burdened with yet more debt.  Greece got the same treatment in the euro crisis and now has so much debt that it will never be able to pay it off this century, while the interest on that debt eats into the available tax revenues needed to provide public services and investment.

French President Macron has wailed at the Euro finance ministers’ decision.  He warned that the EU was in danger of unravelling unless it embraces ‘financial solidarity’.  His solution was a joint virus recovery fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies.  “You cannot have a single market where some are sacrificed,” he added. “It is no longer possible . . . to have financing that is not mutualised for the spending we are undertaking in the battle against Covid-19 and that we will have for the economic recovery.”  Yes, he knows that this was “against all the dogmas, but that’s the way it is”. He meant mainstream neoclassical austerity measures.

Macron recalled France’s “colossal, fatal error” in demanding reparations from Germany after the first world war, which triggered a populist German reaction and the disaster that followed.  “It’s the mistake that we didn’t make at the end of the second world war,” he said. “The Marshall Plan, people still talk about it today . . . we call it ‘helicopter money’ and we say, ‘we must forget the past, make a new start and look to the future’.”

Here Macron echoed the criticism of John Maynard Keynes in his famous critique of the imposition of reparations  imposed by France, Britain and the US on Germany after WW1.  Keynes called for a Scheme for the Rehabilitation of European Credit where Germany would issue bonds and the former enemy nations would guarantee the German bonds severally and jointly, in certain specified proportions. This Keynesian solution is in essence what is being proposed now with EU coronabonds, to be financed and guaranteed by all member states.

But even if coronabonds were introduced would that be enough or even the right ‘solution’ to the massive slump that is now hitting Italy and all the weaker states of the EU?  As right-wing Italian ‘populist’ Matteo Salvini commented: ‘I don’t trust loans coming from the EU. I don’t want to ask for money from loan sharks in Berlin or Brussels … Italy has given and continues to give billions of euros each year to the EU and it deserves all the necessary support, but not through perverse mechanisms that would mortgage the country’s future.’

Italy has a huge public sector debt burden, not because the government has engaged in profligate spending.  On the contrary, the government has adopted permanent austerity, running annual surpluses of tax revenues over spending (excluding debt interest) for 24 out of the last 25 years!

This austerity has meant the running down of public services, the degradation of the health system so it could not cope with pandemic and has added to the terribly poor growth in productivity and investment for over two decades.  As a result, Italian government support in the pandemic will be minimal.  The immediate fiscal impulse for Germany (in the form of additional government spending on medical equipment, short-time work, subsidies for small and medium-sized enterprises, etc.) amounts to around 7% of economic output in 2020, compared with only 0.9% for Italy.

The Italian economy has been in permanent crisis, but the negative economic effects of the Corona shock have worsened it.  On its own, Italy will not be able to get the economy back on track after the Corona lockdown. According to the latest estimates by the IMF, nobody in Europe will have higher gross financing needs (maturing debt and budget deficit) than Italy.

All a coronabond would do is tide Italy’s finances over for the period of the slump, but offer no way to restore the economy, employment and investment.  After the slump, Italy’s public debt would be even higher than the 130% of GDP it is now.  The IMF expects the annual primary surplus on government finances to turn into a 5% of GDP deficit, while debt to GDP rises to 155%.  That is why the interest being demanded by those prepared to buy Italian government bonds has been rising, especially relative to Germany, where the interest is actually negative.

Italian 10yr government bond yield (%)

The reality is that Italian capitalism (like that of Greece) is just too weak to turn things around.

I shall return to the unending tragedy of Greece and its prospects in the COVID crisis in a future post.  But why is Italian capitalism so weak?  And more to the point, why has Italy’s membership of the Eurozone not produced a stronger Italian economy?  The answer lies with the nature of capitalist accumulation.  Unifying various nation states into one fiscal and monetary unit poses huge problems for capitalism.  Historically, it has only been achieved through military conquest or civil war (the federal union of the US was achieved that way by the military defeat of the southern states).

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.

When the Euro was devised, the aim was to bring about closer convergence and integration of EU states by monetary union.  But the EU leaders 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.

As I have explained in previous posts, 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 is 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/exports 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.

This explains why the core countries of EMU have diverged from the periphery since the formation of the Eurozone.  With a single currency, the value differentials between the weaker states (with 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).

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.  So German profitability has risen under the euro while France and the periphery have declined.

A recent paper confirms this explanation of why there is divergence, not convergence, within the Eurozone.

“The emergence of export-driven growth in core countries and debt-driven growth in the Eurozone periphery can be traced back to differences in technological capabilities and firm performance… the macroeconomic divergence between core and periphery countries is driven by the co-existence of two different growth trajectories (export-led vs. demand-driven models), which themselves can be traced back to a ‘structural polarisation’ in terms of technological capabilities.”

The authors conclude that “considering the central role of technological capabilities for the assessment of (future) economic developments, our results suggest that one cannot expect a natural convergence process to materialise in the Eurozone. It is also apparent that the ‘one-size-fits-all’ approach of fiscal consolidation in the crisis-ridden periphery countries from 2010 onwards was bound to fail spectacularly…  Fiscal austerity is adverse to the restoration of strong productive sectors in the Eurozone. Since structural polarisation fuels macroeconomic divergence, the Eurozone must indeed be expected to disintegrate eventually, if the ‘lock-in’ of industrial specialisation between core and periphery countries is not broken up by targeted policy interventions.”

The Italian economy has an ailing banking sector, which is far too large, holds many bad loans and has cost taxpayers many billions in recent years as a result of repeated state bailouts.  There is weak productivity growth and worsening polarisation between northern and southern Italy.  Far from the Eurozone providing new opportunities for Italian capital to expand, it has kept the Italian economy into a quasi-permanent smouldering crisis.  While the German economy grew by an average of 2.0% in real terms and the euro area by 1.4% per year over 2010-2019, real GDP growth in Italy was only 0.2% in the same period.

While per capita GDP (in purchasing power parities) in Italy in 1999 was still around €1000 above the Euro area average, 20 years later – just before the corona crisis began – it had fallen almost €4000 below the Euro area average. Germany, on the other hand, where per capita incomes were already slightly higher than in Italy when it joined the euro, continued to chip away over the same period, resulting in an increasing GDP per capita gap. Italy had already lost two decades in its economic development before the corona crisis.

Indeed, mutual coronabonds, so beloved of the Keynesians and post-Keynesians, is a pathetic response to this crisis.  What is needed is a massive increase in the EU budget from the current ridiculously low figure of 1% of EU GDP to 20%, along with harmonised tax measures to end the ‘race to the bottom’ in taxing corporations, which Ireland leads.  Such a budget could begin to plan investment, employment and public services on a huge scale to benefit all in the EU.  It would be needed to finance a Marshall plan for Europe which Macron talks of, but where the useless major banks of the EU are taken over, along with the public ownership of the major sectors of productive industry.  Then the basis for a real United States of Europe could be laid, where the periphery grows with the help of the core.

Without that, the coronavirus pandemic has the potential to cause an irrevocable break-up of the existing monetary union.  The core countries of the Eurozone are not prepared to achieve a full fiscal union and the redistribution of resources to raise productivity and employment in the periphery. Anyway, full and harmonious development leading to convergence is not possible under the capitalist mode of production. On the contrary, the experience of EMU has been divergence.

The people of southern Europe may have to endure yet more years of austerity in paying back debt to the north.  Even so, the future of the euro will probably be decided, not by the populists in the weaker states, but by the majority view of the strategists of capital in the stronger economies. The governments of northern Europe may eventually decide to ditch the likes of Italy, Spain, Greece etc and form a strong ‘NorEuro’ around Germany, Austria, Benelux and Poland.   No wonder Macron is seriously worried.

28 thoughts on “The euro’s corona crisis

  1. “Italy has a huge public sector debt burden, not because the government has engaged in profligate spending.” how do they have such a large debt then? Is it the bank bailouts you refer to, and/or other stuff?

    Does any country look to be up for super-keynsianism, like the mmt’ers like?

    The tories have been evasive about what economic steps will be in place after the corona crisis, are we set for austerity?

    1. “Italy has a huge public sector debt burden, not because the government has engaged in profligate spending.” how do they have such a large debt then? Is it the bank bailouts you refer to, and / or other stuff? ”
      Good question, and key question to understand the movement, the current film of the capitalist mode of production. Answer: State debt (not only in Italy, but in most countries of the World-System) continues to increase, despite the reduction in state spending (the so-called austerity), because state income is also reduced (the burden tax, taxes). If in addition to reducing expenses you also reduce your income by giving an annual deficit you have to get into debt, yes or yes. That is the whole mystery of growing state debt today. It is, therefore, not an austerity policy but a complete reduction of the State. Unstoppable, permanent and imperative reduction day after day, year after year since the 1980s. It is a setback, a step back from the socialist mode of production (the State as an economic agent) begun in the revolutionary cycle of 1917, and a state decline that It has been producing systematically since the end of the USSR. Reduction of the State and increase of the private capitalist company, that is the formula. What happens when the State shrinks, when it reduces its size and its regulatory power? The main effects are a) That capitalism is concentrated in large private monopoly corporations, destroying small and medium-sized companies and their jobs, increasing social inequality. b) A Union of States like the U.E. it also falls (Brexit, Centro vs. Periferia struggle, etc.) and c) The model’s crises worsen and accelerate, such as the financial crash in 2008 and the Pandemic in 2020, due to less state regulatory power and cuts in public services such as Health. That is the movement and underlying problem of the capitalist mode of production. The problem that he cannot solve without attacking himself and that inevitably secures and brings his end not too far away.

  2. Can i ask , what is your analysis of UK’s trading and competitive position after covid 19 and after its left the EU, is it in a good position to be competitive without sacrificing its working class to austerity and misery?

    1. Well, given that I think the world economy will be in trouble for a few years and particularly world trade, this is not a good environment for British capital to launch out on its own to sign up bilateral deals. British capital is not very competitive anyway with very poor investment and productivity growth, relying on its rentier sectors like property, finance and business services for international expansion. Before the pandemic, it was able to boost GDP using cheap immigrant labour and boost profits by holding down wages. Those options will be under pressure from now.

  3. Thanks, Michael. A good piece! You should rectify this sentence: So German profitability has risen under the euro while France and the periphery have declined. It should be “…while France’s and the periphery’s …”

  4. Excuse me for nitpicking, there is a little typo in the given name of the Dutch finance minister Hoekstra: the correct spelling is “Wopke”, with an “e” at the end instead of an “a”. -ke is the diminuitiv in northern forms of German and in Frisian. The ending -stra of his last name shows his Frisian ancestry.

  5. “His [Macron] solution was a joint virus recovery fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies.”

    Who’s going to tell him the bad news?

    That’s not how capitalism works, and will definitely never happen.

    –/

    “What is needed is a massive increase in the EU budget from the current ridiculously low figure of 1% of EU GDP to 20%, along with harmonised tax measures to end the ‘race to the bottom’ in taxing corporations, which Ireland leads. Such a budget could begin to plan investment, employment and public services on a huge scale to benefit all in the EU. It would be needed to finance a Marshall plan for Europe which Macron talks of, but where the useless major banks of the EU are taken over, along with the public ownership of the major sectors of productive industry. Then the basis for a real United States of Europe could be laid, where the periphery grows with the help of the core.”

    That can’t happen because profit rates would plummet even more (and for every member, including Germany).

    Investments are a loss in capitalist accountancy. It hurts profits in the short and medium terms.

    The birth of the first welfare state was only possible because 1) Europe was already destroyed after WWII anyway, so there was literally no other option than to invest and 2) the USA let Europe rebuild (i.e. it let Europe have trade surpluses against it for decades and decades) because it was fighting as propaganda war against the USSR.

    1. “2) the USA let Europe rebuild (i.e. it let Europe have trade surpluses against it for decades and decades)”

      Nonsense; US didn’t start running trade deficits until the 1970s, and then, mostly because of oil prices.

      During the post WW2 “golden era” which included Europe’s rebuilding, the US ran a consistent trade surplus with most of the countries in Europe.

      Again VK makes stuff up to fulfill some simpleminded ideological requirement.

      Where do you get this stuff, VK? From Boffy?

  6. Reblogged this on DAMIJAN blog and commented:
    Dwefinitivni konec evropske solidarnosti in vrnitev v preteklost.

    French President Macron has wailed at the Euro finance ministers’ decision. He warned that the EU was in danger of unravelling unless it embraces ‘financial solidarity’. His solution was a joint virus recovery fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies. “You cannot have a single market where some are sacrificed,” he added. “It is no longer possible . . . to have financing that is not mutualised for the spending we are undertaking in the battle against Covid-19 and that we will have for the economic recovery.” Yes, he knows that this was “against all the dogmas, but that’s the way it is”. He meant mainstream neoclassical austerity measures.

    Macron recalled France’s “colossal, fatal error” in demanding reparations from Germany after the first world war, which triggered a populist German reaction and the disaster that followed. “It’s the mistake that we didn’t make at the end of the second world war,” he said. “The Marshall Plan, people still talk about it today . . . we call it ‘helicopter money’ and we say, ‘we must forget the past, make a new start and look to the future’.”

  7. “The governments of northern Europe may eventually decide to ditch the likes of Italy, Spain, Greece etc and form a strong ‘NorEuro’ around Germany, Austria, Benelux and Poland. No wonder Macron is seriously worried.”

    Can you explain the rationale behind this? What benefit would there be for Northern Europe to form their own bloc? Don’t they get the best of both worlds with this current setup already?

  8. Sorry to be so dense, but what does Ireland lead in, in this sentence?:

    What is needed is a massive increase in the EU budget from the current ridiculously low figure of 1% of EU GDP to 20%, along with harmonised tax measures to end the ‘race to the bottom’ in taxing corporations, which Ireland leads.

  9. A comment on Michael Robert’s blog; The euro’s corona crisis

    https://thenextrecession.wordpress.com/2020/04/19/the-euros-corona-crisis/

    Europe’s People are about to make a Divergence from Convergence

    Oh, dear! Roberts usually has such good stuff but here he is getting it way wrong. Raise the Eurocrats cut of the common wealth to 20%? The last things those bastards need is more money and more power. Imagine the mess they could make, beyond what they have done already.

    Like most wrong economic ideas, this comes from a misunderstanding of the nature of money. Money is an abstraction, not a commodity. It is used as a unit of account. It is issued by a sovereign power. It has value because the sovereign power designates it as legal tender, which must be accepted as payment for all transactions, and which the sovereign accepts in payment of taxes.

    When an economy is being run properly, the sovereign power manages the economy and regulates the money supply by issuing the currency through government programs, and withdrawing it through taxes. Thus there can be only one sovereign power and one tax system for any currency. And by the way, a real democracy is one where the people are the sovereign power, and is essential to overcoming capitalism.

    A single currency circulating among several sovereign states each with its own tax system does not make any sense. There will be no way to regulate the money supply so that unjustified investments are not made. Most of these sovereign powers will be unable to raise enough revenue and so their economies will decline. All the wealth will be concentrated at the centre of the territories within the currency system, which is how colonial empires work, isn’t it?

    People miseducated in economics, who can only understand money as something banks put out, will be unable to understand this. Banks rule the world, neo-colonial empires enforce their privilege, the idea of truly sovereign and independent polities is beyond their comprehension. Alas, certain Marxist economists also seem to accept these particular shadows on the cave wall.

    The Euro might have been useful if it had just circulated between the treasuries of EU countries, as a way of balancing trade, much the way gold used to be used. As it is now, there are only two ways to go. One is for the Brussels bureaucracy to overthrow the sovereignty of the EU member states, merging all tax systems and most government programs into one. Imagine how well that will go over. But maybe that is what Roberts is thinking? I hope not!

    The other is to get rid of the Euro and return the EU to just being a common market, as it should have stayed. That will also require a long and hard fight because the Eurocracy has had time to entrench itself strongly. They are strongly supported by globalist bankers.

    I could do a good deal of blogging about the political and economic strategies which the people of countries like Italy and Spain will need to pursue to fight their way out of “Hotel California”. But ‘full and harmonious convergence’ is not possible or desirable under capitalism or any other conceivable economic system. Further, a “United States of Europe” would be a calamitously bad idea. That really should be self evident, but it can be the subject of some of my future bloggings.

    The upshot is; if you want an end to capitalism you want an end to the Euro. Cheerleading for the Eurozone while claiming to espouse Marxism is cognitive dissonance. As for coronavirus threatening the collapse of the Eurozone, that was in the works anyway. The pandemic is helping it along.

    People in Europe, as elsewhere, are realizing that elitist power structures are not going to provide them with security and a decent standard of living. The strongly neoliberal Eurocracy is being rejected and new, local solutions are being sought. The sad thing is that The Left at present has gotten totally lost. It has lost contact with reality and with real people.

    I can see the beginnings of a renaissance of The Left but it will take some time to develop. Left political parties are currently talking the same monetarist and Neo-Malthusian climate crap as the elites, constantly betraying their potential support base. The public is doing what the public always does when the existing system fails. It looks to The Left for leadership. When The Left is not there, it looks to the right.

    Rather than look at their own failure, The Left has been screaming about the rise of a new fascism, or about ‘populism’. But the European public seems smarter these days. They are making clear they do not want rabid nationalism and racism. They want their bread and butter issues dealt with. They want their sovereign national governments back, with more direct democracy. They want an end to Neoliberal austerity. This means necessarily that they want less EU.

    The West Europeans are the most culturally and politically sophisticated people on earth. That would be one reason the Globalists hate them so much and work so hard to drive them down with this EU machine. North Americans are in comparison quite backwards. They have not had to work so hard to control us.

    In Canada especially, we are way behind the curve on what is needed to insure security and decent living standards in future. Of course, to insure that public health services are sufficiently developed that pandemics like Coronavirus do not turn into a shambles and an economic catastrophe. This requires building stronger democracy, which of course can only work within the frame of sovereign national states.

    Of course, that is about strengthening the integrity of national states, not breaking them down. It is also about curbing all these extranational institutions, operating without any effective control, which the Globalist financial elite have worked so hard to build up. I have often wondered why so many Marxist and other ‘left’ theorists are so fond of these institutions and so hostile to the nation state, comporting closely with the Globalists.

    This seems to me to be the big flaw in ‘Marxism’. I don’t think Marx himself made this mistake. That is, the failure to understand the need for real democracy, which requires the sovereign state. They seem to see the state just as something getting in the way. And that is just how the Neoliberals see it. So…?

    One final comment; the Marshall plan was never any great benevolent act to help Europe out. It was about helping to lock Europe into the American empire. Southern Europe does not need Macron’s bailout. They were doing fine until they got locked into the Euro. They do not need to be “build up from the centre”. They need all ‘centres’ to leave them alone and let them develop themselves in their own ways.

    To conclude; all facts and fancy graphs presented by Roberts should be read as supporting a ‘divergence’, not a ‘convergence’. His support for convergence comes from looking at it through a warped lens which fails to see that public control over, and accountability from, institutions is essential to dissolving capitalism. How the lens got warped, I do not know. tr

  10. Michael, I have two questions regarding your article:

    1) What do you mean when you say Italy was simply transferring value to germany? How exactly did this happen and how the simple currency facilitated it?

    2) If the difference in OCC between Italy and Germany lead to these discrepancies between them, what about France and Germany (which, I assume are much closer wrt OCC) or even the smaller scandinavic nations. How do these nations cope with the OCC discrepancy with Germany?

    Thanks!

    1. In trade between countries we can look at the balance in terms of goods and services as measured in amounts of money (dollars) but also we can measure the balance in terms of value (socially necessary labour time as measured in money). Given internationally fixed prices for trade in any commodity, the country with a higher organic composition of capital ie technologically superior will be able to produce that commodity in less labour time than one with lower OCC. International competition leads to a tendency for an equalisation of profit rates and so the technologically superior country gains a transfer of value from the lesser country. That value transfer adds to the profitability of the superior economy and reduces that of the weaker economy eg Germany versus Italy. So Italy’s profitability falls relative to Germany. Italy can compensate for this by selling more to Germany than vice versa. That will raise total profits (from net exports) even though profitability is lower because of the value transfer. This is what China can do by running big net export surpluses with superior technology economies in the G7. Italy cannot do this. It loses value (profit) in trade with Germany AND runs a trade deficit. Italy could temporarily compensate for profitability loss by devaluing its currency and so increase exports. But this then opens it up to increased import costs and a reduction in real wages. Devaluation is a never-ending game that does not deal with technological weakness. Of course, Italy cannot even do that because it is in the euro. But leaving the euro would not solve that issue either.

      France and Germany have fairly close OCC ratios and technological superiority for Germany is therefore much less against France. So the transfer of value in trade is much less. I have not checked but the Scandinavian nations are probably on par with Germany in OCC terms.

      This account is not complete without also analysing rates of surplus value, which is another counteracting factor to the basic value transfer from OCC differences. See my recent posts: https://thenextrecession.wordpress.com/2019/11/14/hm2-the-economics-of-modern-imperialism/

      1. Thanks for your answer Michael. I think I am still struggling understanding the notion of “value transfer” when it comes to nations. Do you mean that even if trade was conducted exclusively between Germany or Italy, this would happen (for example, germany would be able to sell its own cars to Italy and not vice versa) or with other nations as well. Or is it because italian commodities “sell below their value” because of the common currency?

        Thanks!

  11. Hello Michael,
    I’m from Spain, where all your articles are translated a few days after their initial publication in your blog. From the comments in this post I can see that they are translated also to Dutch, and probably to other languages. I understand the reason, because you are one of the few marxists that writes regularly with a not so common emphasis on labor value theory. You apply this interpretation to everyday issues with rigour and an easy to understand language.
    I have made this introduction because I believe that a lot of left people in Europe read your articles and I’m not sure if the terms used in this post are clear enough to avoid certain confusions. Getting to the point, I don’t know if most of the permanent references to states in the second part of the article should be in fact references to capitals backed by these states.
    When you say that “Germany has a higher organic composition of capital than Italy” I think that the idea is that German’s capitals have a higher OCC than Italian’s capitals. The problem becomes more evident when we enter in the field of winners and loosers. It is not the same to say that “Germany gains within the Eurozone at the expense of Italy” that saying that German’s capitals gain within the Eurozone at the expense of the Italian ones. The message is absolutely different in this moment where nationalism is on the rise even in left organizations.
    Surplus value (explotation) is the only source of profit in Spain, Germany, USA or Brazil. After that, it comes the distribution of that surplus value between capitalists (the OCC one of the main reasons) at home or abroad. Saying that Germany gains at the expense of Italy mislead an occasional reader into believing that German’s workers have a common interest with German’s capitalist. Later, the message becomes that German’s workers exploit Italian’s workers. It is not an exaggeration, it happened in the past with Emmanuel’s work.
    Of course, I’m not saying that this is what you said. Just that it is better to be very accurate with some expressions when they are directed to a broad audience. It would be great if you could add your comments about this issue. Sorry for the long comment.
    Best regards

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