by Peter Wahl

“While there are many factors contributing to Europe’s problems, there is one underlying mistake: the creation of the single currency, the euro. Or, more precisely, the creation of a single currency without the establishment of a framework of institutions that enable a region of Europe’s diversity to function successfully,” said Nobel laureate Joseph Stiglitz in his 2016 book, The Euro: How a Common Currency Threatens the Future of Europe.

Interestingly enough, the German edition is titled Europa spart sich kaputt, (Europe Is Saving Itself into the Ground), with no reference to the euro at all. This is no coincidence. Anyone who expresses criticism of the euro in the German-speaking world risks being dismissed as “anti-European” and excluded from the mainstream discourse. Nonetheless, many experts have been sceptical from the outset about whether the euro can actually work. Even German Finance Minister Schäuble admitted, “Design flaws in the monetary union have led to misguided incentives that have corresponding economic and, consequently, political consequences.” (FAZ, 25 January 2016)

The single currency as a political project

A single currency is not inherently a bad idea, not least because different currencies are always a cost factor due to transaction costs. A common currency gets rid of exchange rate risk and currency speculation. In addition, a common currency provides some protection against speculative attacks from outside the EU, since it is stronger than the national currencies of member states alone.

When the euro was introduced, politicians assumed that the new currency would accelerate the pace of EU integration. Many also believed that the euro would help level the playing field between Germany and the rest of Europe, thus preventing German dominance. Even though this did not end up happening, it is undeniable that the real motives for the introduction of the euro were political, not economic.

Not an optimal currency area

Reality soon made itself felt. For one thing, political union did not progress as hoped – on the contrary, the EU is further away from it today than ever before. The euro is a currency with no country and 19 countries simultaneously. This makes it a historically unique undertaking.

For another thing, the eurozone in no way corresponds to what would be deemed, in economic theory, an optimal currency area. The euro countries have long-established and widely varying structures, different levels of industrialisation and productivity and different economic traditions. The only solutions for overcoming such differences under the conditions of a common currency are “factor mobility” (that is, the ability for capital and wage-earners to move freely between the regions of the currency zone) and the ongoing economic equalisation of the various regions through regular financial transfers. Both of these took place in Germany after reunification.

The problem is that this does not work in the eurozone. Though there is a single market, there are still a number of legal, tax and cultural differences that limit the mobility of business. The differences in the workforce are more pronounced still. Language barriers cannot be easily overcome, and labour migration inevitably causes a lot of problems for affected persons and their families.

In addition, there is little willingness for solidarity between the individual countries – even if many on the left would wish this to be the case. Calculations have been performed – including by the French Natixis bank – regarding the number of transfers that would be necessary to bring the living conditions in the crisis-hit countries into line with those in Germany or Austria. According to their survey, the EU’s net contributors would need to spend between eight and twelve percent of their GDP for a period of at least ten years. In the case of Germany, this would be an average of ten percent of around 335 billion euros annually; for Austria, 37 billion. Even now, the political balance of power is not sufficient to reach the comparatively small sum of 0.7 percent of GDP for development aid. It is more unrealistic still to think that more than ten times this amount would be enforceable in any shape or form.

Structural problems of the euro plus financial crisis equals rising debt

Though the euro countries were already developing in diverging directions prior to the financial crisis of 2008, it was not until this point that the contradictions of the euro really came to light. Bank bailouts and stimulus packages for cushioning the consequences were so expensive that several countries experienced sovereign debt crises. So-called “rescue packages”, which forced cuts to public spending, privatisation and liberalisation, led to an economic and social crisis that is still ongoing in many eurozone countries to this day. Price competitiveness in the crisis countries fell sharply.

While the member countries still had their own currencies, they had access to two important instruments for combating crises: sovereignty over exchange and interest rates. They were able to devalue their own currencies and reduce key interest rates as needed. Because of euro membership, this is no longer possible. The only remaining option remaining is so-called “internal devaluation” through the reduction of unit labour costs. Of course, this occurs at the expense of wage earners, while the bargaining power of capital is significantly strengthened.

After the euro was introduced, heterogeneity continued to increase. The euro deepened the fractures in the eurozone rather than leading to equalisation. What’s more, these fractures occurred not only between different eurozone economies, but between capital and wage earners within individual member states.

Currency: More than coins and banknotes

A currency is not only made up of coins, banknotes and account balances – it is also enshrined in laws and in an institutional framework. In the case of the euro, the most important framework is the Central Bank and its rules. As such, a currency is a social relationship. This relationship is not neutral, but is characterised by power and power relations. As such, the ECB mandate gives priority to monetary stability, which favours financial assets. The prohibition on state financing also leads to a unique problem, which is that although the euro is a domestic payment instrument, debts in euros behave like debts in foreign currency.

The ECB also occupies an enormous position of power over the central banks of the member states. When the Greek government surrendered to the Troika in 2015, this was triggered primarily by the ECB’s threat to stop supplying the Greek central bank with euros. If Greece had not relented, the flow of cash and thus the country’s economy would have collapsed within ten days. When we talk about alternatives to the euro, we are also talking about alternatives to the power of the ECB and its current economic and socio-political orientation.

The lesser of two evils

The ideal solution would be to shape the eurozone in such a way that economic and social differences between the member states are reduced and that upward equalisation takes place – in other words, to progress in the direction of a common state. At the moment, this is completely unrealistic. This lies at the root of the debate about alternatives to the euro. If an optimal currency area is not a realistic prospect, we must think about monetary alternatives that at least neutralise the euro’s negative potential. The central objective of any such action must be to avoid a confrontational and explosive crash-landing of the monetary union – by being smart enough to make a tempered retreat before it cracks open.

Meanwhile, the crisis has reached such proportions that the alternative is no longer a choice between good and bad, but between the greater and lesser evil. No matter what we do, there is no way out without friction and costs. Essentially, it is about weighing the price of maintaining and saving the euro against the price of an alternative. The “price”, in this case, has both economic and political aspects. If the permanent austerity of the euro regime is paid for in political instability and the rise of radical right-wing forces, this must be part of the calculation.

Furthermore, the choice is not simply between “stay or leave”, but between a range of nuanced variants. The process will be different depending on whether a country leaves alone or does so with others – the Mediterranean neighbours as a group, for example. It will also be different depending on whether the exiting country is Greece, or whether it is a big economy like France or Italy. Ultimately, the truly decisive factor will be whether actions are taken in a cooperative manner or a unilateral, confrontational one. This is particularly relevant for the management of any problems that occur during the transition to a new system. A cooperative solution would allow the debt issue to be solved more easily, for example through debt relief. Stiglitz, like most left-wing Eurosceptic politicians, advocates for an “amicable separation”. In contrast, Le Pen – but also some leftists – seek a unilateral approach. There are numerous incalculable risks associated with the latter.

Some parties, like France’s Left Party, envision a cross between an amicable agreement and a one-sided break – a strategic disobedience approach encompassing a mix of unilateral measures and openness to negotiations. Though it advocates that the Maastricht debt criteria should be ignored, it also seeks to negotiate with partner countries (first and foremost, Germany) and to demand the abandonment of austerity. It also demands reforms to the ECB and key components of the EU economic constitution. Only if Germany is not prepared to change its course will it seek for further unilateral steps to be taken.

There are also several competing ideas regarding what should replace the euro. The most radical alternative, a simple return to the national currencies, rarely receives much support from the left. Most parties envisage combined solutions that enable nation states to retain flexibility regarding the exchange rate whilst also pursuing international cooperation. In such cases, the accusation that they are per se nationalistic concepts is therefore untrue.

A split into northern and southern euro?

One simple suggestion would be to group the economically strong economies in a Northern Zone (the “northern euro”) and the others in a Southern Zone. The northern and southern euros would then fluctuate freely against one another and against third currencies, allowing disadvantages in price competitiveness to be offset by devaluations. At the same time, the Northern Zone would be able to pursue a “strong currency” policy – a highly advantageous move from a macroeconomic perspective, because such a policy drives innovation. During the period in which the Deutschmark was strong, the Deutsche Bundesbank applied this “competitive whip” in a targeted and effective way. With a northern and southern euro, both zones would have their own central bank. The main candidates for the Northern Zone would be Germany, Austria, the Netherlands and Finland.

The advantage would be much greater homogeneity and correspondingly fewer exacerbations of distortions within the two currency areas. Though the idea originates from the academic sphere, it was given a further lease of life by the rejection of proposals for a transfer union – that is, the pooling of debts and the introduction of common government bonds (eurobonds) or other forms of support for the crisis countries. It is on this basis that the idea was adopted by right-wing circles such as the Freedom Party of Austria (FPÖ). From a purely monetary perspective, however, the crisis countries would also benefit from being part of a homogeneous group – for example Greece, Cyprus, Portugal and possibly Spain. This would additionally offer accession prospects for EU members who do not meet the conditions for membership of the euro, such as Romania or Bulgaria.

An internal and external euro

This idea was introduced in 2013 by the French intellectual leftist Frédéric Lordon in the journal Le Monde Diplomatique. He proposed to maintain the euro as an external currency, i.e. in relation to the dollar, yen etc., but also to establish a euro-lira, euro-franc, euro-shilling and euro-deutschmark for domestic cash flows. Within this system, all external and inter-member state transactions would be handled by a reformed ECB, a process that could be accomplished electronically without much effort. The exchange rate with foreign currencies would continue to float on the foreign exchange markets, but a fixed exchange rate for the domestic currencies would be set among the member countries via political decision-making structures and adjusted as necessary. A similar approach (i.e., a fixed exchange rate with adjustments where needed) existed between the dollar and the other major currencies at the time of the Bretton Woods system.

Interestingly enough, such a system already exists using the euro, though hardly anyone has so far taken note of it. A group of West African countries, the so-called CFA Zone (Communauté Financière Africaine), adopted the French franc as their common foreign currency but retained separate local currencies that circulated on the internal market. When the transition to the euro took place, the euro took the franc’s place. The ECB has entrusted the management of this model to the French treasury. The problem with the concept is that the treasury – in this case, one located far away in Europe – continues to occupy a dominant position, and the unilateral scope for action by the individual countries is too small.

Expansion of the European Monetary System (EMS)

The EMS was founded in 1979 with the eight core countries of the European Economic Community (EEC). Another six had joined by 1998. The introduction of the euro did not mean the end of the EMS: it still exists in a miniature form between the Danish krone and the euro, after Denmark rejected the euro in a referendum in 1992. Denmark has done relatively well as a result of this decision. If we take growth as an indicator of economic performance, the country’s performance consistently measures above that of the eurozone. The basic idea of the EMS is to establish, by political agreement, a corridor within which the prices of individual national currencies can fluctuate. If the upper or lower limits are exceeded, the central banks have a joint duty of intervention. One advantage of the EMS is that the power of the ECB is limited, which increases the unilateral scope of countries for implementing alternatives to austerity.

In the context of the current crisis debate, the concept is interesting in the sense that a country like Greece could enter into this functioning system after a euro exit. This would not be an out-and-out “Grexit”, but rather a transition to another mode of monetary cooperation in the EU. If this is done with mutual consent, accompanying measures such as debt reduction (which are inevitable anyway) would also be made feasible. However, most Greeks are not so much interested in this as they are in the symbolic and affective value of belonging to the “Club of the Rich and Successful”. Leaving this club would be considered a loss of status. Such affective ties to a mundane matter like a currency are not uncommon – the Germans, for example, indulged in their D-Mark nationalism for decades. Since German national pride is taboo for historical reasons – and quite rightly, of course – they found a substitute in their love for the German mark.

Which perspective to choose?

All of these concepts have different advantages and disadvantages and raise numerous technical issues. However, they demonstrate that there are clearly a number of alternatives to the euro – ones that would even be acceptable from an emancipatory standpoint. Even if the chances of asserting these options are low in the face of current power relations (though they are still higher than the chances of achieving a “social Europe”), the discussion regarding alternatives helps to develop a third, independent leftist position in the European political debate. This is a position that no longer trails indistinguishably in the wake of social democratic actors and the Greens and, at the same time, is clearly demarcated from the right.

The elites of the eurozone are clinging on to the euro in its current form, and this approach is necessitating austerity and neoliberal reforms. It is now accepted as inevitable that economic disintegration in the crisis countries is growing, as are the levels of dissatisfaction and suffering. As a result of this, the risk is increasing that sooner or later, an elected government will initiate a unilateral and confrontational exit from the euro. If the exiting country is also a major economy, the consequences will be much greater than if flexibilisation measures are introduced pre-emptively. This increased flexibility could accommodate the diversity of the member states and maintain international monetary cooperation, albeit in a different mode than the euro in its present form.

Three lessons

  1. Member states seeking an alternative to neoliberal economic and social policies need scope to extract themselves from the potential for extortion that exists in the single currency.
  2. We must end the iconisation of the euro and weigh up the pros and cons of the various proposals in a clear-headed fashion.
  3. We must develop a third, emancipatory position on the euro debate, independent of Social Democrats and Greens on the one hand and the right on the other.

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