Raphie de Santos
As it currently exists the Euro as the single European currency is highly unstable. Ultimately it can only succeed if backed by a single European state power and the unification of existing national currency reserves. The latter is not the case but the former is only partially true. A single European state can only be created through a real consolidation of European capital. This is clearly not the case in any of the major European industries such as car production, engineering, and banking. The European capitalists have not surrendered the idea of “national sovereignty” of any of their major industries. So for instance there are German, French and Italian car industries. National states are then used to defend the interests of their own national industries, even though they may be multinational or transnational companies their profits are returned to the capitalists of one national state.
The purpose of the European Union was and remains to create pan European monopolies to compete with the US and Japan. This has clearly not happened and we have in Europe a diverse set of economies based on the national capital but with a single European currency based on the idea of the complete integration and consolidation of all the economies.
The European currency is therefore based on this contradiction and should be inherently unstable. These were the fears when the currency was launched but at the time they proved to be unfounded. The low interest rates set by the European Central Bank at the onset of the currency allowed the countries in the Euro to enjoy a boom based on easy credit and a housing bubble. This papered over the contradictions between the national capitals and the wide range of national economies including Germany, Ireland, Spain, and Greece. The latter three countries benefitted from much lower interest rates than the individually weak economies could sustain on their own.
However, the onset of the credit crunch in 2007 leading to the deepest recession since the 1930s saw these contradictions come sharply to the surface. We are very probably in for a long period of stagnating and slowly declining economies, a second depression of modern capitalism. If so these contradictions will remain with the very probable consequence being the destruction of the Euro in its present form and the return of national currencies throughout Europe.
What are the current contradictions that are likely to pull the Euro apart?
The Pull of the Weak Economies
The weaker economies of Spain, Greece, Portugal and Ireland are pulling the Euro in one direction. They initially benefitted from lower interest rates when they joined the Euro. This was an effective devaluation for their economies and allowed them to participate in a boom. In Spain and Ireland in particular this was a property boom. But the credit crunch and the following quasi depression has seen this boom lead to bust and large deficits appear. In the case of Greece the real deficit was concealed by the use of complex derivatives that moved it off Greece’s visible balance sheet.
The Euro is a neoliberal project and restraining deficits to 3% a year for each member country should increase the rate of profit through higher levels of exploitation. The reduction of the ballooning deficits across Europe and in particular in the weaker economies is designed to put this process back on track under the guise of “prudent fiscal management”.
But the fight of the European Central Bank (ECB) against inflation and its desire to impose austerity means that these weak economies have a stronger currency that partially reflects the German and French economies. There are social, cultural and political reasons why they will not be able to impose fully the austerity measures that the ECB wants. If they had their own currencies they could have let them devalue and increase the competitiveness of their economies that way. Their inability to implement the austerity measures demanded of them will put pressure on them to leave the Euro so that this currency devaluation can take place. The pressure to do this will increase if as likely the Euro strengthens against the US dollar on the back of a slowing US economy.
The Pull of the Strong Economies
On the other side of the tug of war over the Euro are the stronger Euro economies of Germany, France, and The Netherlands. Their economies are subsidising the debts of the weaker European economies. This is putting further strain on their own fiscal situations and leading to additional austerity for the stronger economies. There will not only be pressure on these economies from bearing the debt and deficits of the weaker Euro countries but from the electoral disquiet at paying the debts of all the Eurozone countries.
The debts are likely to be much larger than the ECB and the financial markets are estimating. This will happen on two fronts. Firstly the inability of weaker governments to deal with the huge levels of public debt and secondly the inability of the banking system to deal with further financial stress.
Take for example Greece, even if it was able to meet all the three year austerity requirements of the ECB and the International Monetary Fund (IMF) it would be still left with a debt at the end of three years of about 150% of GDP. Of course this austerity programme will create a deep recession – estimates for the shrinkage in GDP this year are around 4%. This will mean that Greece will not have the tax revenues to pay any of this debt or refinance the debt on the international financial markets. Debts of this level can only be sustained by subsidies from the stronger northern Euro economies. While the bailout plan will probably see the weak countries through 2010 the next major hurdle will be the refinancing of the weak Euro countries’ debt in mid 2011. At some point in the next few years Greece and the other weak Euro economies will have to reschedule their debt. This will effectively write down the value of their existing debt by around 40% creating huge losses for banks across Europe. The current stress tests on European banks are refusing to acknowledge the scale of these losses and they are being estimated at a much lower level.
Only seven European banks failed the tests which were supposed to estimate how much money European banks could lose if a similar scenario to the financial and economic crisis caused by Lehman’s bankruptcy was repeated. The test came up with a total capital requirement of 3.5 billion Euros! This shows how divorced from reality these tests were given that the European governments including the British had to fork out hundreds of billions of Euros and Pounds to shore up their banks.
As well as underestimating the losses that European banks would incur from the rescheduling of debt by weak Euro countries there were a number of other short-comings with the tests. The first was that those tests only looked at the front trading books rather than the back loan books where most of the losses were made in 2008-9, mainly on declining commercial and private property prices. Finally, the tests included the banks’ current tier one capital hybrid securities which are government guarantees. Tier one capital is supposed to represent liquid capital which can be quickly turned into cash to cover immediate losses. The tests then overestimated the amount of liquid capital that the banks have at their disposal to cover losses from any new stress to the financial system.
In conclusion, if as we believe that Europe will enter a double dip recession followed by stagnant growth – in effect a quasi depression – then the dual pulls on the Euro will increase. It is unlikely that in this situation that Euro can survive in its current form. The contradiction of a single currency covering competing national capitalisms which have varying degrees of developments will finally be no longer sustainable.