‘Euro’ Looks Likely, But Will Be Weak

By Carl-Erik Isacsson, The Militant, Vol.62 no.4, 2 February 1998

STOCKHOLM, Sweden—A few months ago it looked unlikely that the European monetary union (EMU) would start as planned on Jan. 1, 1999, with initial participation from a majority of the states constituting the European Union (EU). The German rulers were struggling to keep the Mediterranean states, especially Italy, outside a future currency union, by demanding the strict application of convergence criteria for budget deficits, inflation, and other economic factors. Bonn's aim was to launch a common currency that would be as strong as the mark, involving a smaller number of countries closely tied to the German economy, or else to delay the launching of the currency union indefinitely.

While it now appears the EMU will start on schedule with 11 of the 15 EU members taking part, the prospects are dim for the euro to be a strong currency that will strengthen the hand of the main imperialist powers in Europe in relation to their rivals in Washington and Tokyo. And the attempt to implement the common currency will exacerbate tensions between Bonn, London, and Paris.

The two main contenders for dominance in Europe, the ruling classes in Germany and France, have both failed to push through the kind of austerity measures and attacks on the working class they have projected in the name of meeting the criteria for the EMU.

The former government of Prime Minister Alain Juppe' in France had to largely drop its planned austerity measures after workers fought back at the end of 1995 in the biggest labor mobilizations in France since 1968. Chancellor Helmut Kohl's government in Germany launched an attack on the workers in the spring of 1996, targeting sick leave payments, unemployment benefits, and pensions. Hundreds of thousands of workers came out in demonstrations and protest strikes against these austerity measures between June and October 1996, pushing back many of the attacks.

The rulers in France were dealt a further setback last year when the Socialist Party (SP) won early elections called by President Jacques Chirac, reflecting workers' desire to resist the austerity drive. The new SP prime minister, Lionel Jospin, had promised in his campaign to push for changes to supposedly create more jobs in the EU stability pact that lays out the EMU criteria. At the Amsterdam European Union summit in June, however, Jospin was able to get only a fig leaf, as the stability pact was renamed the stability and growth pact without any qualitative changes.

In the first half of 1997, Kohl made concessions to striking coal miners. His projected tax reform and further attacks on the social wage were blocked by the social democrats in the upper house of parliament, reflecting pressure from the resistance among workers.

Moreover, German finance minister Theodor Waigel had to perform the same kind of budget acrobatics that Bonn had accused Rome of in order to meet the EMU criteria of a deficit no more than 3 percent of gross domestic product. Although Italian prime minister Romano Prodi was forced to resign over a package of austerity measures in the fall 1997, he was able to restore his government with only minor changes in the package. It became apparent that Rome would come as close to the 3 percent deficit criteria for 1997 as Bonn and Paris.

Kohl: ‘alternative to EMU is war’

A layer of prominent politicians in Germany have argued for delaying the EMU start if the criteria are not strictly met, including Bundesbank chief Hans Tietmeyer; the prime minister of Bavaria, Edmund Stoiber; and Gerhard Schroder, one of the two contesting candidates for German chancellor in the next elections for the social democratic party. They have been met with a cannonade of arguments from Kohl's government circles laying out a scenario of doomsday if EMU doesn't start as planned.

Germany economics minister Gunter Rexrodt stated last year, A delay implies the great danger of a definitive collapse [of the EMU] and renationalization within the EU.

Along similar lines, Chancellor Kohl earlier declared, The question of war and peace in the 21st century really hinges on the progress of European integration, sparking a storm of protests from British politicians.

The governments of the United Kingdom, Denmark, and Sweden have declared that they will not join EMU at the start. They have been described as a dollar-pound block within EU, since there is a substantial amount of trade done in those currencies. With the Jan. 1, 1999, EMU start date looking more likely, the new Labour Party government in the UK is under pressure to jump on the train as soon as possible. They don't want to be the outsiders in a project that will affect the nearly 60 percent of their trade that is with EU countries. Britain is scheduled to chair the European Union in the first half of 1998, when the negotiations for the start of the currency union will be finalized.

A bad sign for British prime minister Anthony Blair's government was its failure to win the right to attend the informal meetings of the finance ministers of the states that are to join the EMU from the start when they discuss questions concerning the Euro. Many British officials have therefore become softer on EMU, declaring that they plan to join sooner rather than later. The social democratic government in Sweden is following suit.

In May 1998 the countries that are to join the currency union are scheduled to be named and to fix the exchange rates of their currencies in preparation for the EMU. The formula for this will probably be along the same lines as the current Exchange Rate Mechanism, which allows a variation of 15 percent above or below the value of the German mark. Electronic payments denominated in euros will start in January 1999, while the bills and coins will be introduced later.

Political, economic divisions, not union

Smaller monetary unions have been set up in Europe before, but the EMU is by far the largest ever projected. One lesson from history is that monetary unions without political union tend to collapse. For the system to work smoothly, it needs harmonized interest rates, taxes, and fiscal policy to allow transfers of money from one region to another to avert uneven economic shocks, as well as a common immigration policy that allows the free flow of labor between different regions. Moreover, common foreign and military policies would be a precondition for a monetary union to remain stable for an extended time.

But these conditions are not in the cards. Interest rates, taxes, and fiscal policy vary across Europe. Fixing common interest rates for all the euro participants will tend to sharpen any economic shocks, increasing the likelihood and severity of recessions in each country. The annual budget of the EU is only $100 billion, a small fraction of the GDP of the member states, and no government wants to pay more toward it. More than half of this budget goes to the Common Agricultural Policy (CAP)—farm subsidies that are fundamental to the political stability of most of the governments in Europe. How these payments are apportioned is always a point of tension.

The mobility of the workforce across national borders when growth slows in one country while picking up in another is very small, although formally allowed within the European Union. Formally there is also the free flow of goods within the EU, but in reality member states still use national standards, as well as health, safety, and environmental legislation, to bar the entry of goods from other member states.

An even bigger obstacle to a stable monetary union is that the interests of Paris and Bonn often don't coincide. This is reflected in a proposal by the French government to nominate Jean Claude Trichet, currently the governor of the Bank of France, as head of the European Central Bank (ECB). Bonn favors the present head of the European Monetary Institute, Wim Duisenberg, who is Dutch. Since the decision must be unanimous, a compromise is likely, which would be at the expense of the mark and to the advantage of the franc.

In addition there are huge tensions between governments in Europe on foreign and military policy, as shown by the divisions among them over Yugoslavia, Albania, and the expansion of NATO and the European Union into Eastern and Central Europe.

The reunification of Germany also has far reaching consequences for the European Union. It poses the question of whether the EU budget should go to cover the costs of German reunification or to weaker capitalist powers in southern Europe, especially Italy, Greece, Spain, and Portugal. For the ruling class in Germany this is an important consideration, because since the early 1990s they've put about $100 billion a year into trying to turn eastern Germany into a profitable capitalist region, without success and without an end in sight. Bonn depends on a strong mark to attract capital from capitalists around the world, who have seen buying German bonds as business.

Euro will be a weak currency

The EMU is a project with bad odds, but it has rolled so far politically that it cannot be stopped short of a collapse coming from its own dynamic and the dynamic of the world capitalist crises. Already it is obvious that the euro will be a weaker than the still relatively strong mark, and will drag down the German currencies. As such, it will not be attractive for capitalists around the world who are looking for safe havens to place their capital, compared to U.S. greenbacks or Swiss francs in times of financial volatility.

The euro is not a thing. It is a set of social relations that will reflect the relatively weak standing of the ruling classes in Europe, in relation both to the working class and to their capitalist rivals in other part of the world—especially the United States—on military, political, and economic fronts. It will not replace the U.S. dollar as the main reserve currency for world trade, although it will probably diminish the use of dollars in trade and financial transactions in Europe for a time. Today central banks hold about 60 percent of their $1.4 trillion foreign exchange reserves in U.S. dollars, compared with just 20 percent in European currencies. While there will probably be a shift in these figures after the Euro is launched, it will not be like between the first and second world wars, when the U.S. dollar replaced the British pound sterling as the world's reserve currency and Wall Street replaced the City as the financial center of the world.

The EMU and the euro cannot become the strong and powerful means that the ruling classes in most of the states in Europe hope will help resolve their troubles. Its dynamic is more like the attempt to restore the gold standard in the 1920s, which was put forward as a mantra to take Europe out of its deep crisis following World War I, and which in the end helped trigger the financial collapse that was the beginning of the Great Depression of the 1930s.