Europe's instability pact
January 1 2002 saw mass publicity for the official launch of the latest stage in European capitalism’s most central current project, the single currency. Yet just one month afterwards, the euro is facing its most difficult problems since its initial introduction in 1999.
Ironically, these problems centre on the largest European economy, Germany, and have called into question precisely the rules that the Bundesbank and the German government laid down in the Maastricht and Amsterdam treaties to govern the process of monetary union.
What does the economic crisis in Germany mean for the struggle for an alternative vision of Europe to that of the bosses? And how serious are the current upheavals for capital in Europe? ANDY KILMISTER offers some answers.
To answer these questions we need to look more closely at how Europe’s economic difficulties relate both to the current downturn in the world economy and to the specific form that capitalist crisis has taken in Europe.
The immediate problem facing the European Commission arises from the so-called ‘stability and growth pact’, which states that any government in the euro-zone which runs a government budget deficit of more than 3 percent of its GDP can be fined up to 0.5 percent of GDP. This pact is really a continuation of the ‘convergence criteria’ set down in the Maastricht Treaty, which imposed a similar 3 percent ceiling on the deficits of those countries wishing to join the euro.
January 30 saw the first formal warning from the Commission to a member country that it was in danger of crossing this threshold. The warning was issued to Germany, which has a forecast deficit of 2.7 percent of GDP for this year. But this forecast is actually based on projected growth of 0.75 percent for the German economy in 2002. Currently output is rising at an annual rate of just 0.3 percent, and over the last three months it actually fell by 0.6 percent.
Meanwhile, unemployment has shot up by over 300,000 in the last month to 4.3 million, in what looks likely to be a closely fought election year.
It seems increasingly possible that Germany will break the 3 percent barrier and face the Commission with a politically explosive dilemma: either a country with significant economic difficulties will be faced with massive fines from the EU unless it cuts spending and plunges deeper into recession, or the ‘stability pact’ will break down at its first test.
This has prompted a wide-ranging debate among different sections of European capital about the stability pact and its usefulness, a debate which raises crucial questions about the project of monetary union itself.
There are three main constituencies of support for the pact. Firstly, there is the Bundesbank, and sections of German capital which were reluctant to give up the mark for the euro. In many ways monetary union means a lessening of German financial power over other European countries. In each two-way relationship between the mark and other currencies in Europe previously the mark was the stronger element, with the result that all other EU countries ended up adjusting their economic policies to those which the Bundesbank dictated for Germany.
While Germany is the single largest member of the euro-zone, it does not have the same dominance in a situation of pooled monetary sovereignty as it had before. The stability pact, which institutionalises the policies previously followed by the Bundesbank as rules for all participating in monetary union, is in many ways the price exerted by the bank and its co-thinkers for agreeing to the single currency project.
The second area of support for the stability pact is European financial capital in general, which is concerned about promoting the euro as an international reserve currency to rival the dollar and the yen. In order to do this the currency has to gain ‘credibility’ in global financial markets, and the pact is seen as crucial for achieving this.
Restricting budget deficits is supposed to remove the possibility that such deficits will be financed by printing money, a policy which would potentially raise inflation and lower the purchasing power of the euro.
attempt to gain the status of a reserve currency is especially important because of the issue of ‘seignorage’. This refers to the benefits that can be obtained in trade by those responsible for issuing a reserve currency, because they can pay for imports with that currency without having to earn foreign exchange to finance their purchases.
Sections of European capital have looked enviously at the ability of the USA to do this over the last two decades as a result of the status of the dollar. In particular, they would like to establish the euro as the international currency for the emerging capitalist economies of Eastern Europe and the former Soviet Union, and so allow the EU to exploit this status to draw in commodities from this region without having to transfer value in return.
The third grouping which backs the stability pact is that part of European capital which wants to enforce restraints on government expenditure, both in order to ensure lower corporate taxation and to encourage privatisation programmes which will open up new, potentially profitable areas of economic activity to the private sector. Examples include telecommunications, energy, aerospace and transport industries.
In addition to these economic interests, there has been political backing for the pact from those supporters of European integration who are happy to see an essentially unstable structure being set up since they believe that this will provide the basis for the next ‘push’ towards unity.
Specifically, the gamble is that if the Maastricht process runs into serious difficulties because one or more countries face recession as a result of the common interest rates across the euro-zone, then massive pressure will build up for some kind of transfer of resources across the EU to such countries, rather than see the process break down.
This will then, it is thought, create the conditions for a common European fiscal policy and taxation system to match the common monetary policy. It is largely on the basis of such thinking that supporters of closer integration such as Jacques Delors agreed to the stability framework in the first place.
These various groups have created a powerful informal bloc in support of the stability pact and the continuation of the Maastricht limits on government spending. But they now face increasingly strong arguments claiming that the pact is becoming a danger to capitalist strategies within Europe.
Firstly, the support of the Bundesbank and its German allies for the pact is being undermined by the fact that Germany looks likely to be the pact’s first victim. The German finance minister Theo Waigel has raised questions about whether the pact should continue.
Secondly, the pact has been notably unsuccessful in maintaining the value of the euro against the dollar. Over the three years since the initial launch of the euro it has lost 15-20 percent of its value against the dollar and even during 2001 it slightly fell, despite the sharp slowdown in the US economy and the impact of the September 11 attacks.
It is becoming increasingly apparent that the project of establishing the euro as a rival international currency to the dollar is much more difficult than was previously thought to be the case, and is likely to involve a much more dramatic onslaught on working-class gains in Europe than even the pact embodies.
Related to this is a third point: that the pact itself says nothing about lowering taxes. It is always open to European governments to reduce deficits by maintaining, or even raising, taxation. Those sections of European business which want to see dramatic declines in taxation, linked to an attack on the welfare state and a movement towards an Anglo-American style deregulation of social provision, are coming to see the pact as too weak an instrument to achieve their objectives.
This links to a fourth argument, put forward by free-market observers such as ‘The Economist’, which is that the pact is a diversion from the real issues facing European capitalism in its attempt to enforce a neo-liberal strategy. Such analysts argue that the real issues are not macroeconomic figures for government borrowing, but microeconomic questions such as deregulation of the labour market, integration of financial markets, privatisation of pensions with the aim of boosting an ‘equity culture’ and the like.
If these things are achieved, it is claimed, pressures for bringing down government spending will follow naturally, as they have in Britain and the USA. If they are not, then neo-liberalism will be blocked in Europe regardless of the stability pact, and the pact just becomes an irrelevance.
At a political level the risks involved in using the pact to provoke a crisis which will further future integration are also increasingly worrying, particularly since the character of such integration remains uncertain.
It can by no means be guaranteed that a common fiscal policy across the EU will follow neo-liberal, free market dictates, and strategists among European capital remain conscious of the projects put forward just a few years ago by Oskar Lafontaine, for the use of such policies to combat just such ideas. They remain mistrustful of the Jospin government in France, and in some cases, such as the circles around Berlusconi in Italy, have become sceptical of the whole project of monetary union.
It is against this context that the current difficulties of the German economy raise such deep potential problems for European capital as a whole. The controversy over whether the German deficit should be allowed to rise is only the most direct manifestation of a much deeper divide about how the neo-liberal programme can be furthered within Europe and about whether the structures set up at Maastricht and Amsterdam are adequate for doing this.
Yet this divide in itself reflects more fundamental issues about the constraints facing European capitalism.
The launch of the euro, now with twelve member countries, does represent a significant success for the European capitalist class, at least in the short term. It has not proved possible for the working class to block or deflect the central project of European capital over the last decade, except in rather particular instances such as the result of the Danish referendum.
Yet at the same time, it is very unclear that this launch in itself can actually achieve the objectives which supporters of neo-liberalism have set for it.
At a political level, large segments of European social democracy continue to see the euro as a means of protecting the European ‘social model’, rather than of opening it out to the full force of global competition. This may be an illusion, yet it continues to represent a powerful counterweight to neo-liberal strategies.
At an economic level, while Europe has undergone neither the frenzied speculative boom of the USA in recent years, nor the long drawn-out stagnation of Japan, the euro has not provided a magic key to sustained capitalist accumulation.
Unemployment remains high across most of the continent. Even in Spain, the fastest growing large euro-zone country over the last year, growth of almost 3 percent hardly brought the unemployment rate down at all. Working-class resistance to neo-liberalism has remained strong in many of the euro-zone countries, following the upturn in struggle initiated by the French strikes of 1995 and the fall of the first Berlusconi government.
In particular, on the crucial issues of pension reform and the welfare state, neo-liberal forces have yet to score a decisive victory. Financial markets remain unintegrated in significant ways, particularly in the area of stock markets, where London and Frankfurt continue to construct rival blocs in fierce competition with one another.
‘The Economist’ of December 1 2001 reported that in 2000 only a quarter of European merger and takeover deals spanned European borders, and almost 35 percent were purely domestic (the rest involved non-European companies). They compared this with the USA where more than half of all deals are made across state borders and only 17 percent within an individual state.
Most significantly of all, the growth that has taken place in the euro-zone over the last three years has depended to a large degree on the weakness of the euro against other currencies, notably the dollar, rather than on the success of the euro project.
And now, even with a low value for the currency the euro-zone is running a deficit on the current account of the balance of payments, while output growth is a mere 1.4 percent per year and industrial production across the zone is falling sharply.
The launch of a common currency has not provided the basis for a durable upturn in the European economies. Rather, for the euro-zone as a whole, just as for Germany, a brief period of moderate growth fuelled by exports to the rest of the world which were encouraged by the speculative boom in the USA, is now coming to an end as the boom subsides.
This is likely to intensify both strategic debates on the way forward for European integration and the attacks on the working class which accompany such debates.
On the response of workers to such attacks depends not just the future of the stability pact but also the prospect for laying the basis for future struggles against neo-liberalism in Europe over the coming period.