[Socialism Today, No. 6, March 1996]
Lynn Walsh examines the growing fears among European capitalist leaders that monetary union won’t happen as planned, throwing their plans for political union into turmoil
‚France prepares for EMU‘ was the front-cover caption for the Economist on 9/15 December. The dramatic colour photo showed a demonstrator pouring petrol onto a symbolic barricade. Lining up in front of the Arc de Triomphe, which was draped with strikers‘ banners, a crowd of young workers watched the flames.
The irony was appropriate. The Chirac government’s attempt to implement a programme of social security cuts in order to meet the Maastricht convergence criteria for EMU had provoked a wave of public-sector strikes and mass demonstrations. This in turn has triggered a deep crisis in the European Union, raising a serious question mark over the feasibility of EMU. The tensions released by the French events are potentially far more serious than the convulsions triggered by the No vote in the Danish referendum in June 1992, which provoked the most severe period of monetary turmoil since the slump of 1974.
Fearing a social explosion, Chirac has partially retreated, at least for the time being. So has the Swedish government. Both the Maastricht criteria and the EMU timetable have been thrown into doubt. At first this was strenuously denied by Chirac, Kohl, Santer and other EU leaders. But by the end of January it was out in the open. Former right-wing French president, Valery Giscard d’Estaing, called for ‚flexibility‘ in applying the convergence criteria. He warned that insistence on achieving the Maastricht conditions for monetary union by 1999 (inflation below 3.6%, current budget deficit below 3%, and gross national debt below 60% of GDP) could produce even higher unemployment and push the French economy into recession. Giscard obviously reflects the French bourgeoisie’s fear of provoking a new ‚1968‘. In any case, a call for ‚flexibility‘ would seem rather obvious when, currently, only Luxembourg (with 0.1% of the EU’s population) fully meets all the criteria.
Yet Giscard’s comment, echoed by a number of other EU leaders, brought a chorus of denunciation from the various spokesmen of German capitalism. Hans Tietmeyer, president of the Bundesbank, declared that there was „no chance of softening up the criteria“. (Observer, 4 February). Klaus Kinkel, the German foreign minister, said EMU should be completed on schedule, with strict interpretation of the criteria. „If EMU fails, the risks for the German economy will be incalculable. The whole European integration process would be endangered.“ (Financial Times, 26 January).
This divergence is not a mere spat between leaders of two major EU countries. It reflects a growing fissure within the Franco-German axis, the twin-foundations on which the whole EMU edifice rests – or falls.
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When the EMU project was first formulated (promoted by Delors at the height of the 1980s boom) it suited the aims of both French and German capitalism. The representatives of French capital (first Giscard and then especially Mitterrand) sought a way of limiting or at least balancing the economic hegemony of German capitalism. The deutschmark was in fact Europe’s dominant currency, and German economic policy inevitably set the pace for Europe as a whole, especially for Germany’s main trading partners. Far better, from a French standpoint, to integrate Germany into a European structure with a European central bank, through which France could make its political weight felt.
This policy of pushing for a ‚European Germany‘ as opposed to a ‚German Europe‘ became even more urgent for France after the collapse of the Stalinist states and the unification of Germany. Not only did Germany emerge as a major power of 80 million people, but the collapse of Stalinism lifted the ‚Cold War‘ restraints placed on the exercise of German capitalism’s political and diplomatic influence. From the time Mitterrand abandoned his reformist-Keynesian programme in 1981, successive French governments followed the policy of the Franc forte (the strong franc), which pegged the French currency firmly to the deutschmark, resulting in slow growth and high unemployment. The French bourgeoisie as a whole was prepared to pay quite a high economic price for the potential political leverage they would gain through EMU.
The representatives of German capital were not so single-minded. Kohl strongly supported the EMU project. He supported the idea of a European Germany – recognising that, despite the end of the Cold War, German capitalism, because of the legacy of Hitler and the second world war, could not boldly and independently pursue its own aims without provoking a reaction from major European states. Far better to work through the institutions of the EU and the mechanism of EMU – provided its conditions of existence and mode of operation provided adequate guarantees against the risk of inflation, the historic phobia of the German ruling class.
The leaders of the Bundesbank, however, were never so enthusiastic as Kohl. They have always feared that a Euro-bank, in which states with a reputation for ‚profligate‘ social spending would have a big influence, would open the door to spiralling inflation. The price of Bundesbank support for EMU, always grudging and reluctant, has been insistence on strict deflationary conditions – that is the Maastricht criteria.
These criteria, already partially imposed through the operation of ERM, have always threatened to have a drastic deflationary effect on most EU countries. Slow growth, relatively high interest rates, and tight money policy in Germany have inevitably been transmitted to Germany’s neighbours through the ERM and the convergence policy. To some extent, the capitalists of other European countries have hidden behind the criteria – they want cuts in public spending for their own reasons, to increase profits and shift wealth towards the rich and the super-rich. Nevertheless, the Maastricht criteria have aggravated the situation. The marked slow-down in the major European economies since mid-1995 has turned the criteria into instruments of economic torture.
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Neither France nor Germany are expected to grow at more than about 1.5% during 1996. Unemployment is three million in France and has recently risen to over four million in Germany. Investment in manufacturing has halved over the last year, reflecting in Germany’s case massive outward investment to eastern Europe, Asia, etc. The growth of exports of the EU economies fell from over 9% in 1994 to about 6.5% in 1995. In the past, governments would have adopted at least a mildly expansionary policy to counter this downturn in the economic cycle. Currently, cuts in public spending aimed at reducing the budget deficit and gross debt levels have aggravated the downturn. This in turn has led to a decline in tax revenues, tending to push up government deficits even further.
Not even Germany will meet the criteria by 1999. Rising state expenditure (especially to absorb the east) and declining tax revenues have pushed the current budget deficit up to 3.5%. Only tiny Luxembourg completely satisfies the criteria. Ireland satisfies two criteria, but has gross public debt of 83-7% of GDP.
Four EU members could not possibly meet the criteria by 1999. Belgium has gross public debt of 138.7% of GDP; Greece has a current budget deficit of 13.3% and gross debt of 125.4% of GDP; Italy has a current deficit of 8.6% and gross debt of 126.8%; while Sweden has a current deficit of 9.6% and gross debt of 78.9%, with the Swedish government recently retreating on the cuts package aimed at moving towards the convergence criteria. Now that the European economy is visibly slowing down, moreover, there is no real possibility of the other eight EU members meeting the criteria without considerable ‚flexibility‘ being allowed.
This, of course, raises the question of whether EMU can actually be achieved. For the first time, doubts are now being openly expressed by a variety of political leaders. Even Delors has now stated that it will be difficult to achieve EMU „within the agreed timetable“. A former Spanish finance minister, Miguel Boyer, commented that for Spain the Maastricht timetable was „a political trap with a high economic price“. (Independent, 26 January) The head of one of France’s biggest banks, Marc Vienot, pronounced that the chances of France meeting the criteria were ’negligible‘. The Spanish foreign minister, Carlos Westendorp, admitted „we are in a situation of credibility crisis o! the entire (EMU) project“. (Independent, 25 January). He argued that unless a ‚critical mass‘ of EU countries were able to meet the Maastricht targets by 1999 the EU should consider ’stopping the clock‘.
The position of the German leaders is still: Now (1999) or never. All (strict criteria) or nothing. In reality, however, they are faced with considerable problems. Belgium, Netherlands, and Denmark, which depend very heavily on EU and German trade, already form a de facto deutschmark zone. But as far as EMU is concerned, Belgium cannot meet the gross debt criteria, while
Denmark will almost certainly exercise its opt-out right. With some flexibility, Ireland, Portugal and Spain could (on very optimistic growth assumptions) just possibly meet the criteria – but they would undoubtedly be regarded as ‚loose money‘ economies by the Bundesbank, and therefore as unreliable partners.
The participation of France is clearly in doubt, given the growing economic crisis and the massive strike wave, the harbinger of further upheavals to come. Yet without France, the EMU will have lost one of its twin foundations. Germany can hardly turn to Italy as an alternative, with its massive state debt and history of inflationary policies. British capitalism is less and less likely to participate. So what will be left of the EMU project?
At best, there will be a two-tier EU -with an ‚inner core‘ around Germany (Belgium, Netherlands, Luxembourg, possibly France) participating in a monetary union. Even with such an inner core, the successful introduction of a single currency is far from certain (especially if France is included), though it cannot be entirely ruled out given the inter-dependence of investment and trade. However, there would inevitably be growing tension between such an inner core and the other members of the EU. After all, a crucial reason for non-participation in EMU would be retention of the right to devalue the national currency in an attempt to regain ground against stronger trading rivals. But if, for instance, a weakened Spanish or Italian capitalism resorted to competitive devaluation, attempting to step up its imports to core countries like Germany or France, how long would those countries tolerate this position? Sooner or later, the countries of the inner core would inevitably retaliate by imposing quotas or throwing up protective barriers.
The Belgium premier, Jean-Luc Dehaene, recently warned: „I don’t think the countries which suffer now from competitive devaluations will accept it (if EMU collapses). I don’t think the single market is an agreement for ever. It is perfectly reversible“. (Guardian, 5 February). A leading German banker warned that „the final result“ of „recurring competitive devaluations“ would be the „renationalisation of economic policy in Europe“. (Financial Times, 9 February).
Dehaene also stated that, „If we fail [to carry through EMU], I fear we will start an irreversible disintegration process“. This is implicitly recognised by Santer, too, who commented that the single market is linked to achieving monetary union by 1999: „If it isn’t, it will be a great step backwards, and I don’t know whether the single market would suffer from such a blow“. (Guardian, 5 February).
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EMU was seen, in Delors‘ grand vision, as the mechanism which would provide irreversible economic interlinking for European Union, laying the basis for political union. Now it is becoming clearer every day that EMU, in reality, will work as an instrument to lever the EU states apart.
EMU was always a Utopian project, which took flight during the heady boom of the 1980s and the ‚collapse of communism‘ after 1989. Of course, the EMU reflects real trends within capitalism. The increasing inter-connection of investment and trade on a European scale, together with external competitive pressure from the US and Japan, compelled European big business, especially the big multinational corporations, to seek greater integration of European markets – a single European economic space. The ‚common market‘ element has undoubtedly developed quite considerably from the time of the original EEC – and is not likely to be reversed, except under conditions of international capitalist crisis.
The project of a single currency, however, is a qualitatively different matter. This would involve a significant surrender of political control over national economies by the governments of participating states. To some extent, it is true, national economic sovereignty has already been partially undermined by increasing globalisation. It is also true that, under conditions of another prolonged economic upswing the development of a common currency between states with a high level of mutual investment and trade could not be ruled out. Sharing a currency does not in principle bring the dissolution of national states, as the pre-EEC sharing of sterling between Britain and Ireland demonstrated. However, we are now in a period of economic depression, not of upswing. While the development of the EC undoubtedly facilitated the post-war upswing which ended in 1974, it would be false to conclude that the further development of the European Union would in itself stimulate a renewed upswing.
On the contrary, the tendency of capitalism to rise above the limits of the nation state during an upswing will be reversed in a period of stagnation and decline. While the ‚common market‘ reflects economic interlocking, the political superstructure of the EU rests on a complex inter-governmental agreement between the participating nation states. The institutions of the EU are not the embryonic elements of a supra-national state, but in effect the ’standing committees‘ of a complex treaty-arrangement between nation states. All serious commentators agree that the real power in the EU rests with the Council of Ministers, which controls the Commission, and that the Euro-parliament merely provides window dressing.
The functioning of EU institutions depends on agreement between the major participating powers, and political agreement in turn flows from shared aims. National interests have not been dissolved within the EU, but remain compressed within its framework. Under conditions of growing economic and social crisis there will inevitably be increasing divergence of interest between the capitalist nation states, with an unleashing of national tensions.
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The growing divergence of interest between French and German capitalism is, at this stage, the most decisive. Germany’s agenda has changed in a number of ways. Faced with mounting economic difficulties at home, German capitalism has no wish to underwrite the potentially enormous cost of integrating weaker economies into the EMU. When the Bundesbank demands strict adherence to the Maastricht criteria and timetable, it is clear to most commentators that this is really an ultimatum – and they would prefer the whole EMU project to be scrapped. At the same time, German capitalism is increasingly looking towards the former Stalinist states of eastern Europe, to which they have directed massive investment in the recent period. They favour the rapid acceptance of Poland, the Czech Republic and Hungary into the EU, with the possibility of the other former-Stalinist states being accepted later, at least into some form of associated status. Clearly, the inclusion of up to 15 new states to the east would inevitably weaken the cohesion of the EU, ruling out the kind of close political union originally associated with the EMU project.
The French ruling class, on the other hand, is beginning to count the economic and potential political cost of going through with EMU. An increasing number of bourgeois representatives are warning that, far from France dominating Germany through EU institutions, France will be increasingly subject to German economic power. Moreover, continued attempts to meet the Maastricht deadlines are in danger of provoking social movements which can threaten the very power of the ruling class.
The British capitalists are divided, which is reflected in the split within the Tory party. Some of the big industrialists still believe that EMU would facilitate their investment and trade in Europe, and still appear to believe that it is an obtainable objective. Other capitalist representatives, however, and especially the Tory Euro-sceptics, are increasingly doubtful about either the desirability or the feasibility of EMU. They foresee that, locked into a single currency, weakened British capitalism would suffer from the ever-growing Euro-polarisation between the stronger and the weaker economies, with a further acceleration of Britain’s relative decline. This is not to say that British capitalism will prosper in an outer tier, outside the single currency, or even if it were to withdraw from the EU altogether.
A number of the smaller countries, like Ireland, Spain and Portugal, and to some extent Greece, received an initial economic boost from EU entry, through the massive transfers under the Common Agricultural Policy subsidy system and payments from the regional and social funds. This, however, was a once-off effect. Under a single currency, which would deny weaker economies the right to protect their exports through devaluations, these countries would inevitably be weakened vis a vis the dominant economies.
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The European capitalist states are simultaneously pulled in contrary directions. The ultimate dominance of the world market, with massive pressure from the North American and Asian economic blocs, continually drives the national states to seek greater European integration. Yet national interests, which are an organic feature of capitalism, continually throw up centrifugal forces. Not the least of the problems is the massive and growing electoral opposition towards the EU in general and the EMU in particular. There is undoubtedly a nationalistic element in this opposition, but it also reflects the social grievances of workers and disgruntled middle layers, which are being crystallised by the massive spending cuts now being implemented in the name of EMU convergence. Greater European integration, even if further steps prove possible, cannot provide a way forward for European capitalism in the coming years. On the other hand, a reversion to the assertion of national interest cannot provide solutions either, though under conditions of crisis the capitalist states will undoubtedly resort, step by step, to beggar-thy-neighbour policies. This was reflected in Kohl’s recent speech at Louvain university. „If there is no momentum for continued integration, this will not only lead to a standstill but also to retrogression. Nationalism has brought great suffering to our continent“. (Observer, 4 February). This was intended to put pressure on European leaders to proceed with EMU. But in stating that „European integration is a question of war and peace in the 21st century,“ Kohl made ominous reference to the fatal national antagonisms which are built into the foundations of capitalism.
Socialists certainly have no interest in defending nationalist capitalist economies or national currencies. In opposition to the capitalist structure of the European Union, the time is ripe for the workers‘ movement to raise the question of European unity on a socialist basis – a Socialist Federation of Europe – which will only be achieved by the forces of the working class.
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