Tuesday 20 December 2011

Europe's Crisis Measures

It doesn't really matter what you think about the prospects of the euro system surviving long-term, or how much you might focus on the evident flaws in its design and the economic trials of its members today. It is a political project, and state power is now being used to save it. My own view, expressed in the previous article 'Cameron, Merkozy & Europe', is that it will survive for an indefinite period (ie for a year or so, at least). The debt numbers are vast and the austerity to come is horrible, but the alternative is far from attractive, even for Greece.

More importantly, Germany and other key powers are not likely to give up on a system that has worked for them in the past and might still work for them in the future. One sign that this is true is the change in the operations of the European Central Bank. Look at the latest FT story on how expansive their credit will now be. The ECB is offering a huge volume of 3-year loans - perhaps more than €500bn - at low interest rates to banks, funds that they can use, and probably will use, to finance their governments as well as themselves. This far from 'solves' the crisis, but it means that the risk of the euro system tripping into an abyss over the next year because the banking system collapses is far less. The ECB may not be a 'lender of last resort', but it is a lender that understands when its existence is at stake. This measure is a signal of the absurdity of thinking that central banks are 'independent'. Independent of what exactly? They are certainly not indifferent to the viability of imperialist capital. Ask the Fed, the Bank of England or any of the others that have amended their formerly sacrosanct rules in order to try and save the system.

Tony Norfield, 20 December 2011

Monday 12 December 2011

Cameron, Merkozy & Europe

The latest European summit to ‘save the euro’ did little to achieve that end. Instead it revealed the growing political divisions between the UK and the main driving forces of the European Union, Germany and France. We are witnessing another stage in the rebalancing of relationships between the major powers. This article examines what is happening, drawing on the historical background to give insights into current developments. One insight is that the capitalist crisis is far more likely to bring further political deals than to see the collapse of the euro.

The latest news is a big setback for British policy, since the UK can no longer play the role of an important party with a key vote in European negotiations. The foundations of the British position were already crumbling before this week, since the 17 euro member countries within the 27 strong European Union already have a wide range of institutions making policy in areas over which they have exclusive control.[1] Being outside the euro, but a key member of the remaining 10 countries, Britain hoped to maintain a significant voice in policy decisions affecting all EU members. That prospect is now over. As a columnist on the Financial Times put it, the decision by the euro countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce a break up of the European Union itself.[2] 

This may not immediately be obvious. After all, the 10 non-euro countries are still clearly outside the euro group. Why should they follow policies designed to save the euro group? The reason is that all, except the UK and Denmark, are obliged to join the euro system when they meet the membership criteria.[3] If they wanted to join in the foreseeable future, they would have to meet the new criteria; even if they did not, they would all feel under pressure to agree to any new policies that would appear to stabilise the euro system, not least because their economies are very closely tied to that system. By Friday 9 December, they all did agree in principle - with the exception of the UK. 

Prime Minister Cameron was opposed to a political deal among the 27 European Union members to change European Treaties unless there was an exception made for the UK on any future rules that might impinge on the British financial sector. One report claimed that Cameron went too far in the way he proposed this demand. He wanted the EU to pass “a protocol imposing decision-making by unanimity on a number of areas of regulation currently decided by majority voting”.[4] This was seen as a bad precedent for future decision-making, and France and Germany refused to allow it: “Our British friends made unacceptable demands,” said President Nicolas Sarkozy. They claimed that their proposals would improve policies on managing government deficits, and found the UK opt-out unacceptable. It is a sign of how important the UK financial sector is to British imperialism that Cameron was prepared to take this stance.[5] 

My understanding is that the suggested (although not yet even proposed) EU-wide Financial Transactions Tax would require unanimous EU voting approval. In this case, Cameron’s position was a diplomatic blunder. He should also have realised that the last thing that France and Germany would have allowed is to exempt financial markets from further policy measures when they are blaming financial markets for all their problems! Raising the issue in this way was an especially stupid move by Cameron at a time when the EU is trying desperately to save the euro. Nevertheless, economics rules politics, and Cameron’s policy stance was inevitable, given British imperialism’s core interests. Even if there were no plans to impose a transactions tax, or he could stop the tax in the UK, he would still fear other measures that might damage the City of London's potential for parasitism.

France and Germany will probably not plan in future for EU Treaty changes to implement policies because these require unanimous agreement among the 27 EU members. But they are beginning a process to make inter-governmental policy decisions within the EU and without the UK. So Britain is not only outside the euro currency group of 17 countries, it also faces diplomatic isolation. The Telegraph notes a wide range of comments to this effect from major news media in Germany and France, together with reports that the two countries will set up a new ‘Euro-Plus’ group of countries. The immediate policy objectives of the new group would include the “need to foster growth through greater competitiveness as well as greater convergence of economic policies … To these aims, a new common legal framework should be established to allowing for faster progress in specific areas such as financial regulation, labour markets, convergence and harmonisation of corporate tax base and creation of a financial transaction tax." [6] Depending on the manner in which any new policies are proposed, it might also turn out that a majority vote would suffice to make it law within the whole of the EU. 

Why the new euro policy, and will it work? 

While these developments break new ground for European politics, the new Franco-German policies will do very little to shore up the euro, which was the whole point of the summit. The proposed fiscal deal does nothing at all to resolve the current euro debt crisis. It could be asked why new fiscal borrowing rules even had to be raised at this point within the whole EU and not just within the euro member group. The reason is partly as suggested above: the fact that eight of the 10 non-EU members are presumed to be willing to join EMU at some stage, so they would need to be willing to get their fiscal policies in order ahead of this. There is also the factor that a Treaty change was necessary to force the new fiscal rules into national law, not just as an informal agreement between members. 

These fiscal rules will not now be implemented via a Treaty change, and it will take a long time for them to be accepted by different countries. Some may even decide that the German proposal for an externally imposed cut off point for fiscal deficits does not make any sense (it doesn’t). However, the proposal does provide a policy fig leaf for the European Central Bank to begin to intervene more aggressively in debt markets to buy – or to encourage euro banks to buy - the bonds of countries hit by the crisis.[7] Reuters has even quoted Sarkozy saying that private banks could borrow from the ECB at 1% and then lend on to their governments! It is unclear how far the ECB would allow this, but if it did then Italian banks would be able to lend to the Italian government at rates much lower than the current market rate (6-7% in Italy’s case). This kind of fix, which would have been seen as outrageous only a few years ago, is now par for the course. Apart from that, Chancellor Merkel probably hopes that the new fiscal plans it will play a role in persuading the Bundestag to agree new euro rescue spending. Here the argument will be that the new strict budget rules will prevent unending bail-outs.

All this might buy time, a currency the ECB cannot print, before yet more plans are laid to try and secure the euro monetary system. Nevertheless, there will still be demands for austerity in most countries. While austerity will undoubtedly make the crisis worse, there is no real scope for further economic stimulus. It is not only that debt levels are already very high; in recent years there has been a steadily diminishing effect on the economy from the accumulation of debt.[8] Now the debt itself has become a key problem, threatening financial collapse. This has nothing to do with the euro; it is a feature of all major capitalist economies, certainly including Britain. Within the euro system, however, Bloomberg reports that governments have to repay (and so get a refinancing of) more than €1.1 trillion of long- and short-term debt in 2012, with about €519 billion of Italian, French and German debt maturing in the first half of the 2012 alone.[9] That sum is more than huge, and is a reason why regaining ‘market confidence’ is a prime policy objective for all euro countries. A dive in the euro’s value on foreign exchanges and a several percent drop in stockmarkets on Monday suggest that ‘confidence’ has not been restored. 

The euro: history of the present 

The institutional design of the euro system is a mess, one that was recognised by many writers before EMU began in 1999. A single currency across such a wide range of countries is bound to need a mechanism for fiscal transfers from a central fund towards which everyone contributes. An effective fiscal transfer mechanism also implies a political union, or some kind of agreement between member countries that will maintain the integrity of the system. In the case of the euro, the creditor northern European countries - especially, but not only, Germany - wanted to avoid this fiscal union, fearing that they would end up paying all the bills. Instead, they set out various rules of good behaviour, trying to limit government deficits and debt for prospective members. This was the origin of the Maastricht criteria, part of the Treaty setting out the terms of monetary union, signed in 1992. Monetary union is clearly a political deal between member countries that agree to a common set of rules and regulations, but the richer countries wanted the potentially big economic benefits without bearing the possible economic cost of a political responsibility to keep the system working. That view may now be changing, though in a far from clear-headed fashion.

It is worth reviewing some key points in the history of developments towards European monetary union to see how important this project is for the major European powers. This will also show why they are not likely to let it fail, despite the heavy costs that the world crisis has now brought them. 

Economic cooperation in Western Europe began with Germany, France, Italy and the Benelux countries attempting to rationalise their coal and steel industries just after the Second World War. Later, their efforts covered broader areas of the economy, including atomic energy, in the 1957 Treaties of Rome that established the European Economic Community. This economic cooperation was always in the context of rivalry between the six countries, but they had enough shared interests to do important and mutually productive deals. A common objective has been in place since the 1960s: to develop an economic bloc that is a counter-weight to the overwhelming power of the US. EEC membership expanded in the 1970s beyond the core six, to include Britain and others, as the first major crises of the post-war period, with the ensuing economic and financial turmoil, encouraged more countries in Europe to join the trading bloc.

In the 1970s, managing the currencies of member countries moved to the top of the European agenda. For most of the post-war period, global currency rates had been fixed against the dollar under the Bretton Woods system, with only isolated cases of a national currency’s dollar value being revised down (UK, France, Spain) or up (Germany, Japan). After 1971, however, strains on the dollar-based system resulting from relative US economic weakness led it to break down completely. As a result, the European trading bloc tried to develop its own system to limit the damage from currency volatility and the Exchange Rate Mechanism was established in 1979. There were many currency crises over the next two decades, not least sterling collapsing out of the system in 1992 after just two years. But every crisis propelled the core European powers further towards the goal of a single currency, a development that was made clear by the Delors report of 1989. Britain did not join in this process, for reasons covered in the next section.

By the start of monetary union in 1999, 11 countries had joined the single euro currency project. This was well beyond the original concept of perhaps only five members (excluding Italy), or six (all the EEC founders), who could meet strict economic criteria. But the promise of a stable and large economic area had become more attractive. This was especially so after the 1997-98 Asian crisis and the Russian debt default had caused more panic in global trade and financial markets. Both the weaker European countries and the stronger ones wanted economic security. Being part of a group of countries trading together with a common currency looked a lot more appealing than being battered every few years by sharp moves in currencies, interest rates and flows of capital.

Germany, given its economic strength, had always found itself favoured in financial crises. This was as much a curse as a blessing, because strong inflows of financial capital pushed up its exchange rate. A too-strong Deutsche mark threatened the exports of German industry, and trouble elsewhere undermined the weaker countries that were Germany’s external markets. These countries, even those in as favourable a position as France, found themselves on the rack when the DM rose in value, having to raise their interest rates and to impose deflationary policies, or else to devalue and suffer financial penalties. So the single currency system of the euro was seen as good for everybody. By 1999 it also seemed that the broader the euro area, the better to maximise the benefits of cross-border trade and investment.

This was the background to the more relaxed German view of wider EMU membership, a membership that expanded further after 1999. While economic differences between richer and poorer members might be large, all member countries were expected to gain from the single currency and the growing economic relationships. Germany was nevertheless concerned that weaker countries might take advantage of the new euro system, leaving it to pick up most of the bill for any sorting problems out. So strict membership criteria were imposed. Countries could only join the euro if their finances met certain criteria on government debt and deficits, and if their economies looked fit enough to survive in a regime where no devaluations were possible to restore lost competitiveness. 

Of course, in practice the rules were bent. In the lead up to the start of EMU in 1999, public sector debt at 60% of GDP was the rate that European economic policy wonks considered to be the maximum compatible with long-term economic stability. But both Belgium and Italy had debt ratios between 110-120% of GDP – somewhat more than a few decimal points adrift. German politicians and central bankers had always expressed doubts about Italy’s financial integrity. Nevertheless, it was an important trading partner. Belgium’s debt level was even more problematic, however it was so closely integrated with the German economy that a top Bundesbanker once quipped to another European official that their EMU membership was guaranteed – Germany would ‘buy’ Belgium if necessary. As long as these countries promised to sort out the government debt issue over time, that was OK. Belgium and Italy could also claim that they were making good progress, and had cut government spending to meet another rule that the annual deficit was below a maximum 3% of GDP.

These exceptions to the rules made it clear that EMU was as much a game of political decision making as a purely economic project. Expanding the scope of the membership group and increasing the euro’s economic weight also looked like a good idea, even if some of the new prospects were on less stable ground. These potential members had far smaller economies than the two large players, Germany and France, who accounted for half of euro area GDP. If things did not go well, no great trouble was expected. Famous last words, of course, but there were rules to monitor, though not to control, or put sanctions on, the economic performance of member states. Even if there were trouble, the Maastricht Treaty establishing the system said that no member state was liable for the debts of any other member state. It did not turn out that way, as the recent history of Ireland, Greece, Portugal, Spain and Italy shows, but it looked like a good idea at the time.

The euro single currency project was thus born out of a coincidence of interests between the major European countries. Starting from a series of economic policy arrangements, it developed into monetary union, spurred on by the financial crises that are endemic to capitalism. However, the economic currency deal at the core of the euro system did its best to avoid even addressing the political question of what should be done if things go wrong. There was an illusion that economic rules would enable the members to avoid explicit political decisions about who was in charge. This led the US once to complain that they didn’t know whom to call when they wanted to contact ‘Europe’, but the development of the crisis has now put a Berlin telephone number at the top of the list. 

Britain and Europe 

The UK has been happy to be a member of the 27-nation European Union, but it has always dealt with the EU principally as an economic grouping centred around the single market. British politicians have never signed up for the more overtly political dimension of the EU that, especially since the 1989 Delors report, had the objective of drawing all members into a monetary union and, by implication, eventually also into a political union.

Britain’s separation from the European project has rested on its own interests as an imperial power. While Europe is clearly a major trading partner and the location of much British overseas investment, Britain also has a wide range of non-European interests. The strong British political link with the US, the so-called ‘special relationship’, is one means of protecting these. Britain has also depended on the US connection for its military policy, and used it to develop and promote its financial sector, one of the key mechanisms Britain has for deriving profits from the global economy.[10] 

These factors have meant that a succession of British governments did not see a strategic advantage in joining the European project beyond getting involved in the more narrow, single market economic dimensions. For Britain, the real decision on EMU membership was whether there would be an advantage in being part of a single currency system dominated by the decisions of other countries, given that it would also lose control of its currency and monetary policy. Consistently, the British judgement has been no.

In 1991, John Major’s government gained an ‘opt out’ from the Maastricht Treaty – an opt out that not only meant that Britain was not obliged to join EMU at some point, but also that it did not have to sign up to the social and employment chapters of Europe-wide legislation, thus giving British capital a freer hand to downgrade employment conditions. The counterpart to this deal was that Major gave Germany’s Chancellor Kohl clearance to recognise Croatia, a German area of interest in the former Yugoslavia. This was one of the factors helping provoke the savage conflict between Serbs and Croats in Yugoslavia as that country broke up. Croatia is now a candidate member of the EU.

Britain’s longstanding strategy for Europe has been to encourage a wider membership of the EU as a means, it hoped, of delaying or preventing the emergence of a more overtly political union over which it would have less influence. But it is not simply ‘perfidious Albion’ that looks after its own interests, as a report of a meeting on 20 January 1990 between UK Prime Minister Thatcher and French President Mitterand shows. The report is from the UK Cabinet Office and it describes the concerns each leader had with an emergent Germany, one on the verge of re-unification in 1990: 

“President Mitterrand said that he shared the Prime Minister’s concerns about the Germans’ so-called mission in central Europe. The Germans seemed determined to use their influence to dominate Czechoslovakia, Poland and Hungary. That left only Rumania and Bulgaria for the rest of us.” 

Where is our share of the loot? It is in such confidential meetings that imperial plans are more openly admitted. At this time it was not colonisation, but a plan to open up a wider range of countries to exploitation within the orbit of the major powers of the EU. 

Britain’s diplomatic isolation from the other EU countries now puts it in less of a position to do deals with and have leverage over other European countries. It was reported today that the US was not happy with Britain’s new position that makes it a less useful ally, and a far less useful European port-of-call than it was before last week. The conclusion one would have to draw is that British politicians’ self-congratulation about not being part of the euro project is going to be replaced with soul searching on the best route out of this crisis. The Brits can no longer depend on much help from other powers if their own financial system hits the rocks again. Prospects on this score do not look too good. Apart from the huge levels of UK debt that are on the UK government’s books, and on the balance sheets of companies and individuals, there are some other items, such as the loss of £26 billion that it has now incurred from its purchase of shares in Royal Bank of Scotland! 

Conclusion: European power plays

So, we have an interesting situation when it comes to sizing up the positions of the major European powers and what they might do next. Germany’s relative economic strength has come through, but it does not have endless amounts of cash, also being threatened with a credit rating downgrade. Neither does it have the experience of France and the UK in political strategy. The latter have bigger mouths, but smaller wallets, so they have limited room for manoeuvre in a crisis. While the UK is diplomatically isolated, at least until the next bout of turmoil, France is in a not much better position. Sarkozy has rejoiced in the term ‘Merkozy’, at least giving him the position of the back half of the pantomime horse. However, one commentator has suggested that even the term ‘Merkely’ might be overstating his real influence. 

France, nevertheless, does appear to have won a key point in the bilateral deal with Germany that is now put forward as EU-26 policy: private bondholders will not be forced to take any losses in future bond rescue plans. This does a great service to French banks that are much more exposed than their German rivals to potentially defaulting countries. The quid pro quo appears to be that France must sign up to the German-inspired fiscal plans, but that is a pain to be borne on another day. 

Alliances between euro members have traditionally been built on either side of the Franco-German pivot. The balance normally falls in favour of Germany, which has the biggest economy and pays the biggest share of the bills. Germany can count on the Netherlands to be onside, the country that has been within its economic and financial sphere for decades. The first president of the European Central Bank, Wim Duisenberg, was formerly in charge of the Nederlandsche bank, and basically took the position because he was close enough to Germany without being German. Austria, Finland, Belgium and Luxembourg – each a creditor nation - make up the other usual supporters of German policy. France, by comparison, has fewer natural allies among the financially stronger euro members, and its previous overtures to the weaker southern members, Italy and Spain, may not offer much bargaining power in a crisis that affects them most. This explains Sarkozy’s more recent close alliance with Merkel. 

The diplomatic dance is far from over yet, but for now the balance of forces looks to be against British imperialism - at least until the next euro crisis. Cameron must be feeling miffed that the alliance with Sarkozy has broken up so soon after the cooperation in attacking Libya. He must also be feeling sidelined by Merkel who declared that “I don't believe David Cameron was ever with us at the table.” [11] While Merkel and Sarkozy have a marriage of convenience, their union looks to be somewhat longer lasting, resting as it does on the joint need to keep the euro show on the road.

Tony Norfield, 12 December 2011

[1] These include the European Central Bank, the European Financial Stability Facility, the euro group of finance ministers, etc. However, in the past, decisions that might affect the outer group of 10 countries were normally negotiated at the EU level among the 27 members.
[2] Wolfgang M√ľnchau, ‘The only way to save the eurozone is to destroy the EU’, Financial Times, 9 December 2011.
[3] Sweden has a de facto opt out, not the legal one given to the UK and Denmark. Sweden did not join the exchange rate mechanism, a pre-condition for joining the euro at a later stage. It also voted against introducing the euro in 2003.
[4] See ‘The moment, behind closed doors, that David Cameron lost his EU argument last night, The Economist, 9 December 2011.
[5] The ‘financial transactions tax’, or the so-called Tobin tax, will never be agreed by the UK, nor by the US, given the importance of the financial sector for these powers in particular among the major imperialists. See for background, ‘The Economics of British Imperialism’ on this blog, 22 May 2011.
[6] See ‘EU treaty: Britain now faces a Europe that is becoming hostile’, The Telegraph, 10 December 2011.
[7] So far the ECB has bought a little over €200bn of government bonds in the secondary market, of which around €50bn are Greek bonds.
[8] See ‘Capitalist crisis, Keynesian delusions’, 5 September 2011 on this blog.
[9] See ‘Euro Leaders Agree Budget Rigor, Leave Next Step to ECB’, Bloomberg 9 December 2011.
[10] Britain’s US connections were also a key reason for France, under De Gaulle, to veto Britain’s EEC membership applications in both 1963 and 1967. The UK eventually joined in 1973.
[11] The Guardian, 9 December 2011.

Saturday 3 December 2011

Imperialism and the Law of Value

It is rare that you stumble across a gem. But if you look carefully, the probability rises. A few weeks ago I came across one such gem of Marxist analysis. It does the best job I have seen of explaining clearly the principal features of imperial exploitation in the global economy today.

The analysis is found in a PhD thesis entitled ‘Imperialism & the Globalisation of Production’, written by John Smith and dated July 2010. The link to the pdf (1.5MB) that can be downloaded is:

For me, the key contribution of the thesis is a clear conception of how the law of value developed by Marx has to be modified for imperialism today. Lenin defined imperialism as a special stage of capitalism and noted that “If it were necessary to give the briefest possible definition of imperialism we should have to say that imperialism is the monopoly stage of capitalism”. Smith shows how to understand the rise of globalised production under the domination of major corporations as a means by which the imperial powers extract value from oppressed countries.

The common argument one will find – explicitly among academics, implicitly elsewhere – is that in ‘poor countries’ wages are low because productivity is low. The implication is that there is no exploitation of poor countries by the rich ones – the latter are seen as having higher living standards based on their higher productivity. This view is compatible with some comments in Marx’s Capital, and it is a view held by many who claim to have a Marxist understanding. But it has no validity in the world economy today.

Smith shows clearly how various measures to demonstrate higher productivity in the rich countries are based on statistics that distort reality. He gives a striking and concise way to express this: GDP and other statistics that purport to measure ‘value added’ actually reflect value appropriated, not value produced. This tallies with the example I gave about the €4.95 T-shirt in my article on this blog on the ‘China price’.[1] There is much more in Smith’s thesis that is worth discovering, not least a destruction of the myths propagated by many radical critics of imperialism.

One difference I would have with Smith’s analysis is that he tends to work with the view that there is one single ‘value of labour-power’ in the world economy. This implies that the much lower wage in oppressed countries indicates a ‘super-exploitation’ of the workforce, with their wages being far below the value of labour-power (ie below the world average value).

I would agree that a vast reserve army of labour in many countries might allow capitalist companies to pay wages below the value of labour-power in oppressed countries. The extra flows of workers from the countryside into factories, etc, would allow capitalists to pay for their labour supply at rates below what is socially necessary for reproducing the existing workforce. That is besides the frequent use of direct force to raise rates of exploitation. However, I think that a concept more consistent with the theory of value under imperialism is that there are different values of labour-power worldwide, rather than there being an ‘average’ value that has any reality under imperialism.[2]

Insofar as companies move from ‘high cost labour’ areas and gravitate towards ‘cheap labour’ areas, then wages will be pressured lower in the former and higher in the latter countries. To that extent there will be an averaging process. However, the process is very prolonged and very uneven. It is also a process that is starting from a position where differences in living standards are huge.[3] It may be possible to construct an average of some kind, but if there is no mechanism to make other values move significantly towards that average – at least within 20 years! - then it will have limited use as a concept explaining imperialism today. The persistence of vast differences in living standards between countries closely corresponds to the division of the world economy between oppressor and oppressed countries, and the privileges that the former are able to extract in the world economy. This makes a more direct recognition of these differences the valid approach.

This, however, is a small difference of emphasis. Smith’s work is an original and insightful analysis of imperialism today and is well worth studying. 

Tony Norfield, 3 December 2011.

[1] See ‘What the “China Price” really means’, 4 June 2011 on this blog. The data indicated that the labour cost of the T-shirt made in Bangladesh was roughly 10-15 cents, and the cost on arriving in Hamburg was €1.41, with the rest of the ‘value added’ made up from costs of transport, shop rent, sales and marketing costs, profits, taxes and so forth that added up to the €4.95 shop sale price. This is how the imperialist power ‘adds value’ to the product of sweated labour in the official statistics!
[2] Smith certainly recognises these differences, and he cites the immigration controls that are a principal factor keeping them in place. Control of the world economy by monopolistic capital sees many other barriers to the ‘free market’ that will result in longstanding differences in rates of return on investment, etc. This does not suspend the law of value, but shows that it operates in a different way under imperialism than when Marx was writing.
[3] For example, hourly compensation costs in manufacturing may be 10, 20 or 30 times higher in the US than in oppressed countries, see ‘What the “China Price” really means’, 4 June 2011. The charts in this article show a clear, massive divergence of wage levels between imperial and oppressed countries.