Friday, October 06, 2006

Econ-Atrocity: Why the Euro is wrong for Europe, and America

Why the Euro is wrong for Europe, and America
By Gerald Friedman,
CPE Staff Economist
October 6, 2006

I still have some old French Francs floating around my desk drawers, but their only value these days is as souvenirs, an English word of French origin meaning a “token of remembrance,” a “momento,” “of sentimental value.” Instead of national currencies like the Franc, since January 2002 a new currency has circulated in 12 European countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain). (Three EU members, Denmark, Sweden, and the United Kingdom, remain outside the Eurozone; the 10 new members admitted in May 2004 are all scheduled to adopt the Euro in the next few years.)

Since the end of February 2002, the old national currencies have been demonetized. But I am not alone in holding onto old Francs. Many of my friends and neighbors in Paris this summer admitted holding onto Francs, and people still give prices in Francs. I suspect that much of the affection for the old currency reflects deep disappointment with the Euro; and I fear that this is spreading into disenchantment with the entire European project. There are many small problems with the Euro: unattractive bills, a general shortage of small denomination coins (‘monnaie’), and a widespread perception that when prices were converted from national currencies to the Euro the conversion rate was rounded up to give a boost to profit margins. But the real problem is that the Euro was sold to Europeans under false pretenses. It was presented to the European public as a painless way to raise productivity, reduce unemployment and promote growth. But it has done none of these; on the contrary monetary integration has come with slow growth and persistently high unemployment. Today, it appears that the Euro’s promises were never serious; instead, from the beginning, the Euro was a weapon in an ongoing attack on the European welfare state.

Proponents promised that replacing national currencies with the Euro would raise productivity by reducing the costs of changing money and allowing businesses to market their goods more efficiently in foreign countries. No one should be surprised that these specious promises have not been realized. Money changing remains a large business in European tourist destinations, with stands changing dollars, yen, and other currencies into Euros instead of into Francs. The money-changing business is declining, but this is due more to the ATM and the use of credit cards than to the Euro. As for the trouble businesses have with multiple currencies, the invention of the pocket calculator and computer spreadsheet, not to mention the nearly universal use of the United States dollar, has virtually eliminated the cost of calculating foreign exchange rates as a business consideration.

While the Euro has done little, or nothing, to raise productivity, it has had great economic significance. By preventing countries from balancing their international accounts through changing currency values, the Euro forces all of Europe to adopt a uniform economic policy regardless of different national needs. Worse, the rules and treaties behind the Euro give this uniform policy a strong deflationary bias, tying the hands of European governments and preventing labor and socialist administrations from taking effective action against rising unemployment and stagnant real wages. With different currencies, countries could maintain different growth rates while devaluing their currency to balance any differences in national inflation rates. But countries with a common currency are driven to a uniform growth rate because faster growth and a higher rate of inflation will lead to an exodus of business and jobs to a country’s slower growing trading partners. Logically, uniformity could come with all countries growing faster and driving down their unemployment rates even at the risk of somewhat more inflation. But the rules of the common currency were written to prevent this. The 1992 Maastricht Treaty that established the European Monetary Union leading to the Euro, established stringent conditions for countries entering the monetary union including limits on the use of fiscal stimulus to reduce unemployment and an explicit requirement that monetary convergence be on the basis of lowering inflation to a common, low level. Furthermore, authority over monetary policy was given to an appointed and undemocratic Frankfurt-based European Central Bank charged with holding down inflation but with no official responsibility for reducing unemployment or maintaining high growth rates. And, through practice and design, the dominant role in Europe’s new uniform monetary policy went to the Continent’s strongest economy, Germany, a country that entered the Euro with an undervalued currency. Now, Germany has a $200 billion trade surplus and its strong export industries are pulling up the value of the Euro which has risen by 60% against the dollar since 1998. Germany’s bankers and wealthy cash holders applaud the rising value of the Euro; but by lowering the cost of imports and driving up the price paid for Europe’s exports, the rising Euro value has been a dead weight around the neck of European industries, contributing to high unemployment throughout the Eurozone.

In the Euro we see the designs of a new economic order intended to undo a century’s social progress. Democratic politics has brought into place welfare states that redistribute income from rich to poor, from lucky to less fortunate. By cushioning citizens and workers from economic misfortune, by limiting the burden of unemployment, welfare policies have promoted democracy by limiting the power of wealth and control over access to the means of production. From the beginning, by promoting free trade ahead of political union, the European Common Market was founded on a contrary principle to free market exchanges from the ‘burden’ of state regulation. Now, the Euro brings recession, unemployment and slow growth to a continent without effective democratic political institutions able to regulate continent-wide markets and monetary institutions. As a result, instead of national or super-national Keynesian growth policies, Euro-zone politicians can only try to alleviate unemployment by driving down wages and reducing taxes in a beggar-thy-neighbor attempt to attract the favor of bond markets and footloose capital.

The petty problems of the Euro will be fixed. More coins will be minted and I suspect that artists, scientists, and humanitarians will find their way onto the bills. Maybe they will even replace the silly bridges pictured on the bills with examples of Europe’s great architecture. But the real problems will be harder to fix because they require changing the very direction of European integration and the Community’s vision of freedom. So far, integration has been an economic affair; in practice, it has been concerned with freeing capital from local and state regulation rather than freeing citizens by giving them the opportunity to regulate capital through democratic action. On its current path, the Community has become a battering ram, breaking down democratic regulation, and the dream of European integration has been hijacked to become a weapon in the class struggle against labor and the welfare state. Meaningful change will require restoring democracy to Europe.

* Bernard Moss, Monetary Union in Crisis: The European Union as a Neo-Liberal Construction (London, 2005).
* Joerq Bibow, “How the Maastricht Regime Fosters Divergence as Well as Fragility,” Levy Economics Institute of Bard College, Working Paper 460 (July 2006).

© 2006 Center for Popular Economics


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