New currency, more austerity: Selling out to the euro

By Laurent Carroué, Le Monde diplomatique, January 1999

On 1 January 1999, the euro formally replaced the national currencies of 11 European countries. For a time it seemed that Europe's governments might use monetary union to co-ordinate a programme for growth and job creation. Instead they handed control of the economy to the new central bank, depriving voters of a say in how Europe's economy is run.

The launch of the euro (1) was preceded by a huge campaign to promote it. This initially concentrated mainly on the technical aspects of the currency change, though in the past two months there has been a heated debate over interest rates. This has served to distract people from the political and social issues that are crucial for Europe's future.

The election of social-democratic governments in Italy, Britain, France and Germany has significantly altered the balance of political forces within the European Union: 11 of the European Union's 15 governments are broadly speaking of the left. At first sight, things have never been more favourable for redirecting the EU building process towards more social objectives. We have seen a rejection of the liberal politics of the past decade, and their corollaries: austerity, social exclusion, precarious employment and mass unemployment. The extraordinary meeting of the Council of Europe in Luxembourg in November 1997, when the world financial crisis was in full spate (2), already signalled a sea-change in being exclusively devoted to employment.

The weeks following the victory of the red-green coalition in Germany last October seemed to consolidate this change of direction. That month a number of front-line leaders made some ground-breaking proposals that broke with ultra-liberal orthodoxy. Germany's finance minister, Oskar Lafontaine, proposed reforms to the international markets: to make them more transparent and less volatile, and limit the power of the speculators, he called for limits to be placed on permissible swings for the three major world currencies, the dollar, the yen and the euro. Italy's treasury minister, Carlo Ciampi, called for a relaxation of the growth and stability pact agreed in Amsterdam in June 1997, and Lionel Jospin pressed for a reform of the International Monetary Fund (IMF) and holding a new Bretton Woods conference (3).

In November 1998, the Council of Europe met in Pörtschach, Austria, and issued a call for interest rates to be lowered as a means of stimulating growth. Interest rates in Germany and France remain very high in real terms—at 3.3% -- with inflation standing at between 0.5% and 0.7% a year. For several weeks this change of tone gave a tantalising hint of a change of course for European policy.

But these sorts of government statements have angered Wim Duisenberg, the Netherlands' president of the European Central Bank, who argues fiercely that the bank should be completely independent of what he sees as the intrusion of politics. Furthermore, in early October he made it clear that his sole objective was price stability—in other words keeping inflation below 2% per annum (whereas the US Federal Reserve is concerned about both price stability and growth). The ECB together with the German and French central banks and various pressures from all sides, soon managed to bring the leaders concerned back into line.

By mid-November the idea of limiting the fluctuations of international exchange rates or taking steps to stimulate growth had been thrown to the winds. The joint statement by the finance ministers of the 11 social-democratic governments, issued at their 22 November meeting—called The New Way for Europe, which has powerful free-market overtones—restated the need to abide by the stability pact, and claimed that the effects of liberalising the world's capital movements had been broadly positive.

Was this blindness or a late and ill-timed conversion to a cause? The statement was truly shocking with the ravages of the world financial crisis clear for all to see. The governments of the Fifteen are caught in a pincer of their own contradictions between, on the one hand, their stated intentions on employment and Europe's social agenda, and on the other, their obedience to the finance markets and the logic of monetarism as it has developed and been accepted over recent years. Massimo D'Alema, leader of the (ex-communist) Democratic Party of the Left and recently nominated as Italy's prime minister (4), is a case in point. He has adopted a budget which is extremely austere, completely in line with those of his predecessors—and all done in the name of Europe.

It was in this context that the governors of Euroland's 11 central banks announced simultaneously on 4 December 1998 a coordinated drop in interest rates to 3% (3.5% in the case of Italy) (5). Hailed by both the media and the markets, who saw it as a welcome to the euro, the measure has been viewed less enthusiastically elsewhere. In fact, the decision was only taken after the official restatement—in mid-November by all the European governments—of a commitment to budgetary austerity. For the sake of public opinion, it is camouflaging what is actually an ideological and political capitulation—a drastic curtailment of political sovereignty in favour of a supranational institution which is non-elected and therefore not answerable to the people of Europe.

Even before it began its operational life, the ECB received striking confirmation of its veto rights over the budgetary, fiscal, economic, social and wages policies of the EU's member states. And this despite protests at the very highest levels. So the 4th of December was like April Fool's Day. An institutional mechanism has now been established that will make it impossible to build an alternative socio-economic and monetary initiative in Europe. So, far from constituting a new shared sovereignty, it is a real setback for democracy.

The coordinated lowering of interest rates indicates the depth of the EU's economic and financial problems. Despite claims that Western Europe is a haven of stability, the continent is now beginning to feel the effects of the world economic crisis. At a time when, according to World Bank figures, world growth was set to fall from 3.2% in 1997 to 1.8% in 1998, the domino-effect recession which has affected Asia, and then Japan, Russia and Latin America, is now affecting Britain, Italy and Germany. There has been a significant fall in Europe's export figures since the first quarter of 1998, even though the EU's external trade represents less than 10% of its GDP.

The very relative relaxation of monetary policies by the central banks is, however, accompanied by budget policies that are perfectly orthodox. The economic and social cost of these policies in terms of Europe's economy is a heightened risk of deflation (a cumulative fall in prices, output and jobs) and the risk of serious recession, with domestic demand drying up at a time when consumption and domestic investment are needed as the core of a dynamic economy.

Thus Italy's huge efforts to join the single currency explains why for the past three years its economic growth has been the weakest in the EU (1.5% in 1998). Official figures put unemployment at 12.5%, but the viability of Italy as a single national entity has been threatened by a worsening of the north-south split. Unemployment stands at 6% in the north, but 22.3% in the south. Most of the jobs registered as created in the south come from the government having regularised workers in the black economy.

More generally, there is a problem in the Bundesbank's ability to use the ECB to impose on the EU its cult of the strong mark and the strong euro, transforming the euro zone into a deeper and geographically enlarged mark zone. It carries within it the seeds of increasingly serious regional tensions, due to structural imbalances between the various national and regional economies.

The present situation results from choices made several years ago in drawing up the Maastricht Treaty, in particular the provisions regarding transition to the single currency and its subsequent management. The political and institutional architecture that was created aimed to block all options other than ultra-liberalism. It has proved very effective. The priority of governments that parade their social-democratic credentials should be to break out of this straitjacket. First, by renegotiating the stability pact.

Unlike the status of the ECB, which figures in the Maastricht Treaty and can therefore only be altered by a further treaty, the pact was simply an intergovernmental agreement. What one Council of Europe meeting did in Amsterdam in June 1997 another meeting could as easily undo. What a conservative ruling majority has constructed can surely be altered by one of a different political persuasion. And in so doing, Europe's new governments would just be giving themselves the means to apply the mandate of by their electorates—for growth and employment.

The mission and powers of the European Central Bank need to be redefined. It should become the means of promoting a real pact—a pact for growth and job creation in Europe—breaking with the logic of financiers and monetarists. In this context, it is crucial to re-examine the bank's independence in regard to democratically elected governments.

There has to be a clear shift in the supporting structures that will operate with the transition to the euro, such as the regional, national and community-wide coordination of wages policies, fiscal harmonisation and economic policy in general. The taxation of savings and companies, capital and labour pose serious questions for the EC's future orientation: is the Union to become a well-ordered space of production and cooperation, or will it become the scene of widespread social and fiscal dumping? The firm opposition of Luxembourg and the United Kingdom to proposals, however minimal, aimed at regulating Europe's tax havens (Luxembourg, Monaco, Liechtenstein, the Channel Islands and the Isle of Man) is a sign of what is at stake.

Notes

(1) The 15 EU states, with the exception of Denmark, Greece, the UK and Sweden, have joined.

(2) See Manière de voir, Anatomie de la crise financière, no 42, November-December 1998.

(3) Concluded on 22 July 1944 between 44 countries, Bretton Woods accords established the basis of the post-war international economic order and created the World Bank and IMF.

(4) See Rossana Rossanda, Italy proves the exception, Le Monde diplomatique English edition, January 1999, in the Guardian Weekly and on the Internet.

(5) For 1998 inflation in the euro zone is less than 2%.