The Citizen: Issue 3
Author: Anthony Coughlan
The Origins of the Euro
That great political realist, Germany’s nineteenth-century chancellor Otto Von Bismarck, once said: ‘I have always found the word “Europe” on the lips of those politicians who wanted something from others which they dared not demand in their own names.’ In political terms, the cant of modern Europeanism – talk of the ‘European ideal’, the supposed ‘need’ for Europe’s unification, and the like – is rhetorical cover for the national interests of the states concerned, particularly France and Germany, the countries that have been the engines of EU integration for the past sixty years.
The myth of origin of the EU is that it was essentially a peace project to prevent wars between France and Germany – as if a propensity to go to war between such powerful neighbours was in some way genetically inherited! The historical reality is that the prime objective of the first step towards supranational integration, the 1951 European Coal and Steel Community, was to reconcile France to German rearmament in the context of the establishment of NATO and the start of the Cold War.1
At the time, the US wanted German rearmament in face of the USSR. This naturally alarmed France, which had been invaded and occupied by Germany in World War II only a few years previously. Jean Monnet was the US’s man in the affair. He sold the idea of putting the coal and steel industries of France, Germany, and Benelux under a common supranational High Authority, the predecessor of the Brussels Commission, to French Foreign Minister Robert Schuman. Monnet drafted the Schuman Declaration announcing the scheme, and it was issued on 9 May 1950, a date the EU commemorates to this day as ‘Europe Day.’
Thus the political purpose of the original EEC was to make German rearmament acceptable to France and to provide an economic underpinning to NATO in Europe. At the same time, it gave the elites of the former continental imperial powers (France, Germany, Italy, Holland, and Belgium) the hope that they could collectively become a big power in the world, when it was clear that in a post-war world dominated by the military superpowers, the US and USSR, they could no longer be big powers on their own. Seduced by the old European imperial dream of ‘Big Powerdom,’ the political and business elites of the different EEC countries embraced ‘Europeanism.’
Forty years later, another shift in Franco-German power, Germany’s reunification following the collapse of the USSR, led the two countries to establish European monetary union and the euro. France’s President De Gaulle once said that he liked Germany so much that he preferred two of them! Now, in 1989, the West German state expanded overnight with the addition of some twenty million East Germans.
Again, as in 1950, this hugely alarmed France. President Mitterrand tried to persuade Russia’s Gorbachev to prevent it, but that was unrealistic. Germany’s Chancellor Kohl was aware of French disquiet. A reunified Germany would not only be Europe’s strongest economic power but would also be a political power. France, on the other hand, possessed nuclear weapons, which the German reunification treaties prevented Germany from having. France and Germany had a common interest in remaining joint captains of the EU integration project. If they stayed together, they knew they could push whatever policy they were committed to through the Brussels institutions, while preventing any other group of EU states from adopting policies they did not like.
The resulting Franco-German deal gave us the euro, embodied in the 1992 Maastricht Treaty on European Union. Germany agreed to abandon the Deutschmark, the symbol of its post-war economic success, and subsume it in an EU-wide supranational currency, which France would have a key say in running. France, in return, committed itself to working towards a supranational political union, together with a common EU foreign policy and defence and military regime. This would give Germany a key role in running a potential EU world power, with its finger on a European nuclear trigger in due course.
In official parlance, Maastricht was European Monetary Union in return for political union – more crudely, it could be said to have been the Deutschmark for the Euro-bomb! A Franco-German army brigade, with joint officers and joint command, was simultaneously set up as symbol and prototype of the EU army of the future.
The Inherent Contradictions of EMU
The euro was thus established primarily for political reasons, using economic means that were quite unsuitable for this purpose. The eurozone is an area with one currency but sixteen different states, governments, budgets, tax policies, and political cultures. Most economists who were not euro-ideologues were against it on economic grounds. The irrationality of this ill-conceived and inevitably doomed project – doomed for both political and economic reasons – is now playing out before our eyes.
Exchange rates are always fixed for political reasons, and they cannot be more fixed than in a monetary union. All independent states are monetary unions, but they are political and fiscal unions as well. As monetary unions, they have their own currency and, with that, the capacity to control the domestic price of that currency (the rate of interest) and its external price (the exchange rate). As fiscal unions, they have their own taxation, public spending, and social service systems.
By virtue of citizens paying common taxes to a common government in order to finance common public spending programmes throughout the territory of the state, there are automatic transfers from the richer regions and social classes of each country to its poorer regions and classes. This sustains and is sustained by a shared national solidarity, a mutual commitment to the common good of the political community in question, which gives the state legitimacy and sustains its authority.
By contrast, the euro-currency project, the EU’s Economic and Monetary Union (EMU), is a monetary union but not a fiscal union. Joining it deprives the poorer EU states and weaker economies of the ability to maintain their competitiveness or to compensate for their lower productivity, poorer resource endowment, or differential economic shocks by adopting an exchange rate or interest rate that suits their special circumstances. Yet it fails to compensate them for that loss by the automatic transfer of resources from the centre that membership of a fiscal union at national level brings.
Compensatory fiscal transfers at EU level to the extent required to give the EU’s monetary union long-run viability are impossible in view of the volume of resources required and the unwillingness of the richer EU countries, Germany in particular, to provide them to the poorer countries because of the absence at EU level of anything comparable to a shared national solidarity that would support such transfers. Currently, EU expenditure in any one year amounts to one per cent of the EU’s annual gross domestic product, a relatively tiny sum. This contrasts with expenditure on public transfers by the EU member states individually of between one-third and one-half of their annual national products.
Thus the political and fiscal solidarity that would sustain an EU political union and an EU multinational federation does not and cannot exist. Democratising the EU in the absence of a European demos is impossible. Unlike the US, the EU is not one country or one people – it is comprised of many peoples, whose allegiance remains to their own countries and nation states.
The more European integration is pushed ahead and the more the national democracy of the EU member states is undermined, the more the EU loses legitimacy in the eyes of the citizens of the states; and consequently, the greater and more certain the eventual popular reaction against it. To align oneself with such a misguided, inevitably doomed project is to be out of tune with history. It is to side with a supranational elite against the democracy of one’s own nation state and to spurn genuine internationalism for the intoxication of building a superpower.
Thus EU integration is a project of Europe’s political elites, and particularly the elites of the big countries that decide fundamental EU policy and aspire to turn the EU into a world power. To achieve this, they need to hollow out Europe’s traditional nation states and shift ever more powers to the supranational level, where they see themselves operating as benevolent technocrats on the world stage. They despise the values of national democracy and national independence. ‘The two pillars of the nation state are the sword and the currency,’ Commission President Romano Prodi exulted in 1999, ‘and we have changed that.’ For many on the political left and right, ‘Europeanism’ and hostility to the democratic nation state have become substitutes for the failed political ideologies of the twentieth century.
Economically, the eurozone is not what economists call an optimal currency area – that is, an area in which a common currency facilitates economic transactions between regions with broadly similar levels of industrial development, labour productivity, and resource endowments; and whose inhabitants are willing to pay taxes to a common government to finance transfers to less well endowed citizens or communities within the area’s borders, because of a shared community solidarity. Yet the treaties require all EU member states to join the eurozone, with the exception of the UK and Denmark, which negotiated legal opt-outs under Maastricht. As Europe’s biggest exporter, Germany, in particular, gains big advantages from EMU because the weaker EU countries can no longer use currency devaluation to defend themselves against German imports. Nonetheless, Germany, with its high rate of savings and balance of payments surplus, is so economically conservative that it is unwilling to expand domestic demand to stimulate employment in the eurozone’s deficit economies, as should happen if the EU were really functioning as a unified economic area.
‘There is no example in history of a lasting monetary union that was not linked to one state,’ said Otmar Issing, chief economist of the Bundesbank and later director of the European Central Bank. Euro-federalists would like to use the present crisis of the euro to give the EU control over national budgets and, in due course, national tax systems and much else. German Chancellor Angela Merkel expressed this neo-imperial ambition frankly on 13 May 2010, when she said: ‘We have a shared currency but no real economic or political union. This must change. If we were to achieve this, therein lies the opportunity of the crisis. And beyond the economic, after the shared currency, we will perhaps dare to take further steps, for example, for a European army.’
Even if EMU could be pushed towards a fiscal and political union, with common rules for budgets and taxes, the democratic reaction against it by citizens who wish to decide their affairs in their own national states would cause it to explode. There are several examples of states, mostly multinational ones that were political, monetary, and fiscal unions but have vanished into history, precisely because the solidarity that bound their different nationalities and regions together, sometimes for long periods, broke down. Where now is the USSR rouble, the Czechoslovak crown, the Yugoslav dinar or the Austro-Hungarian thaler?
The Euro and the Current Crisis
The current capitalist crisis, which is centred in the US, the EU, and Japan, has resulted from the collapse of various asset bubbles that had been blown up for decades by unregulated bank lending in the so-called ‘free market’ economies.
This collapse cut government revenue in many countries, while government spending on public services and unemployment benefit grew. The result has been soaring public sector deficits, especially in the countries where the bubbles were biggest. In Europe, these were the PIGS countries: Portugal, Ireland, Greece and Spain. Governments added to these deficits by pouring billions into bailing out their national private banks for the benefit of the shareholders and creditors/bondholders, the latter mainly being banks in other countries.
Under capitalism, banks are private profit institutions. The sensible response to the banking crisis would have been to let those that were insolvent because of collapsing property values go bust or else to force their creditors/bondholders to take a drastic ‘haircut’ for making improvident investments. Public money could then have been put into new ‘good’ banks, state-established if need be, which could lend directly to private businesses and citizens, so stimulating economic growth and avoiding a depression.
This would not be bank nationalisation, which means taxpayers assuming the bad debts of insolvent private banks and is in no way a radical demand in the present crisis. It would mean, rather, the establishment of ‘good’ banks as new legal entities. These could take over the buildings and staffs of the existing insolvent banks if necessary, letting the latter be wound down in accordance with the normal laws of the capitalist market.
The result of these developments is the sovereign debt crisis that has riven the eurozone as the PIGS countries, with their big budget and balance of payments deficits, look for bail-outs from high-saving countries like Germany and Holland that use the same currency. How will things turn out? Either Germany will abandon the euro during the coming decade, because it no longer suits German interests to finance transfers to the PIGS; or Germany will succeed in imposing such austerity and pain on the latter through the EU institutions that some of them will prefer to default on their debts and leave the eurozone.
They could thereby regain their lost economic competitiveness by restoring their national currencies, devaluing them, and using them to stimulate demand in their depressed economies to encourage growth and create jobs. They could, then, also inflate away their domestic debts if desired, which is a classic remedy for excessively debt-burdened countries. Such a course would not be painless, but it would be less painful than trying to reach German levels of competitiveness inside EMU by cutting pay, profits, and pensions for years to come, a form of internal devaluation with small prospects of long-term success.
That the PIGS countries are faced with this dilemma is a consequence of their foolishness in joining the eurozone in the first place, as a result of the uncritical Europhilia of their political elites. They should have retained their national currencies as EU members such as Britain, Sweden, Denmark, and Poland have done. The latter thank their stars these days that they retain the flexibility that having sovereignty over their currencies gives them.
The Way Out for Ireland
In September 2008, Taoiseach Brian Cowen and Finance Minister Brian Lenihan gave their infamous blanket guarantee to the Irish banks, from which the credit crunch, NAMA, and the current decimation of the Irish economy have all stemmed. The Department of Finance seems to have advised the politicians badly. Two years later, the new Secretary General of the Department bemoaned the lack of professional economic expertise among his staff. It was rather late in the day!
Brian Lenihan was a lawyer, newly appointed as Finance minister – he knew little about economics, although, presumably, he knows much more now. On the night of the disastrous guarantee, he found himself confronted on behalf of the banks by Dermot Gleeson, not just chairperson of AIB but also Lenihan’s professional senior at the Bar as a former Attorney General. The two Brians were quite right to guarantee peoples’ deposits in the banks, the savings of citizens, and so head off a bank run. Their folly was to simultaneously give a state guarantee to the banks’ creditors and bondholders, who, unlike the depositors, could not run anywhere. These were mostly foreign banks from whom the Irish banks had borrowed over the years for on – lending to Ireland’s booming property market and who had made good profits on those loans.
Now, with Irish property prices plummeting and the investments of these foreign banks going belly-up, Messrs. Cowen and Lenihan promised that the Irish state and Irish taxpayers would ensure that they got their money back in full, even if it meant years of pain for the Irish people, a credit crunch, austerity, mass unemployment, and a return of emigration. Small wonder politicians have forbidden the two public enquiries into Ireland’s banking collapse from examining what happened on that night!
In this way, as economist David McWilliams and Professor Morgan Kelly of UCD have brilliantly described, Ireland has been turned into a vast debt-service machine by the criminal incompetence of its own chief policy-makers.2 It has become a ‘bankocracy’, ruled by bankers.
The EU is a bankocracy too. The €750 thousand million in loans that the eurozone governments agreed for Greece and the other PIGS countries in May 2010 is not to benefit these countries’ citizens but to prevent their banks defaulting on their loans from French, German, and other EU banks. The latter were happy to make money stoking the PIGS asset bubbles under EMU and now fear these countries defaulting. Naturally, the EU praises the Irish government for its solicitude for banks, native and foreign – socialism for the rich, some have called it.
Undoubtedly, future historians will see joining the eurozone and abolishing the Irish pound as the biggest mistake ever made by the Irish state. The value of having one’s own currency and, with it, the ability to follow an independent exchange rate policy was shown decisively in the period from 1993 to 2001, when the currency markets forced our politicians to abandon a fixed exchange rate. This was the only period in the history of the Irish state when it did this and, in effect, floated the currency, giving us a highly competitive exchange rate. This boosted Irish exports, inhibited competing imports, and gave us the Celtic Tiger years of high economic growth.
From the 1920s to 1979, the Irish pound was pegged at a par with sterling, reflecting the conservative economic outlook of those then running the state. This gave Ireland an inherently overvalued currency, which held back economic growth and employment in those years. In 1979, we broke the link with sterling but tied ourselves instead to the Deutschmark in the European Monetary System in preparation for EMU. Britain did the same, but the markets forced Britain to devalue in September 1992. When this happened, Ireland’s europhiles in the Central Bank and Department of Finance decided to stick with the Deutschmark, so that by January 1993 the Irish pound was worth 110 pence sterling, making it one-tenth more valuable than the British pound.
All hell then broke loose, for our overpriced currency was ruining the state’s foreign trade, which was mostly with the UK and US, and the high exchange rate was clearly not sustainable. This forced a devaluation of one-eleventh from 110 to 100 pence sterling in February 1993. We had a similar devaluation vis-á-vis the dollar and, in effect, floated the Irish pound. This floated downward for the rest of the 1990s. It was a nominal 90 pence sterling when we adopted the euro, equivalent to an effective exchange rate of some 80 pence sterling, allowing for differences in unit labour costs.
At the time, the Republic did roughly one-third of its trade (i.e. exports and imports together) with the other eurozone countries, one-third with the UK, and one-third with the US and the rest of the world.3 The 1993 devaluation gave us a highly competitive exchange rate. This, in turn, encouraged foreign and domestic investment. Our annual economic growth rate, which had averaged three to four per cent a year from the 1960s to the early 1990s, doubled to seven per cent in 1993-4, the year of the devaluation. It averaged eight per cent a year from then to 2001. In the first years of euro membership (from 2002), the value of the euro fell vis-á-vis the dollar and sterling, adding fortuitously to Ireland’s economic competitiveness.
With supreme folly, Ireland’s ultra-europhile politicians decided to join the eurozone on the assumption that the British would join it in a year or two; but they did not and will not. An attraction of the eurozone for some was its one-size-fits-all interest rate regime. The euro will give us permanently lower interest rates, said the ESRI’s John FitzGerald at the time. Eurozone interest rates were then low to suit Germany and France, which were in recession. Ireland was experiencing a boom and needed higher interest rates to prevent price bubbles. Instead, we halved our interest rates on joining EMU – this gave huge impetus to the borrowing binge that followed between 2002 and 2007.
Now we are caught inside the eurozone with an overvalued euro exchange rate, while the sterling and dollar areas, with which we do the greater part of our trade, float their currencies downward and we cannot do likewise. They, thereby, have cheaper prices, which encourages southerners to stream north to do their shopping.
Who are the people responsible for this course of folly, which has brought the Irish people to the verge of ruin? The prime culprits are the euro-federalists in Iveagh House and Merrion Square, who advise and write the speeches for Foreign Affairs Minister Micheál Martin, Finance Minister Brian Lenihan, and their predecessors, backed by their ideological cheerleaders in the editorial office of the Irish Times. They include the Grand Panjandrums of Irish euro-fanaticism: Garret FitzGerald, Peter Sutherland, Alan Dukes, Pat Cox, Brigid Laffan, Brendan Halligan, Ruairí Quinn, David Begg and their acolytes in the leadership of our political parties and the media.
What lesson has the currency crisis for Irish republicans, the political left, and the labour movement, and what is the best way forward? It is James Connolly’s old lesson that the struggle for national independence and national democracy should have priority over everything else until these have been attained; and that to attain them, democrats, whether on the left, right, or centre of politics, need to unite, or at least campaign in parallel, as they did to some extent during the Nice and Lisbon Treaty referendums.
In the present context, this means raising the demand for the Irish state to leave the eurozone, in order to restore an independent Irish currency and, with that, to regain essential economic instruments for advancing the Irish people’s welfare. This is central to any realistic way out of the crisis. It is to join the other states that are in the EU but are not trapped in the eurozone and to restore our economic sovereignty. Unless action is based on that, all the media rhetoric about delinquent bankers and developers, business interests bemoaning the credit crunch, and trade unions calling for priority to be given to jobs and investment is so much blowing against the wind.
1. The best history in English of the EU integration project is C. Booker and R. North, The Great Deception: Can the European Union Survive?, (Continuum 2005). Its main defect is that it fails to give sufficient attention to the role of business interests, such as the European Round Table of Industrialists and the Union of European Employers Confederations (UNICE), in pushing EU integration.
2. David McWilliams, Follow the Money, (Gill & Macmillan 2009), and his weekly articles in the Sunday Business Post and Irish Independent. Morgan Kelly, Irish Times, 22 May 2010; see also the website www.irisheconomy.ie, where his work is discussed.
3. The percentages for 2008 are: Total trade-eurozone, 34 per cent; UK, 24 per cent; rest of world, 42 per cent. Exports-eurozone, 39 per cent; UK, 19 per cent; rest of world, 42 per cent. Imports-eurozone, 25 per cent; UK, 33 per cent; rest of world, 42 per cent. Source: Statistical Yearbook of Ireland 2009.