Download GUE Could the Euro have a fairer global value, for jobs, to defend

GUE Euro10.05
A fairer global value for the Euro, for jobs,
to defend Social Europe and promote growth ?
(Draft for discussion)
Regan Scott,
Labour & European Research, London
([email protected])
Summary Recognising the scale of the European economic crisis and political
stasis, this note proposes that a managed deprecation/devaluation of the Euro
currency against the US dollar needs to be considered by the Left and labour
movement for public and professional debate.
It draws on previous work by the author on a Keynesian development bond for the
Euro zone, using the excess currency reserves of the Euro zone.(*1) It poses
arguments about the political process required for such a proposal to be a credible
political instrument and the technical feasibility and macro-economics of a substantial
move towards restoring Euro/dollar parity
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Changing Times ?
Maybe, to understate the imperatives, it is time for the Euro currency to commence its Phase
4 of development, for this is the institutional and programmatic state of affairs. This means
that, apart from the crisis about the future of the Constitution, there is a formal debating
window opening for examining a radically different basis to the orthodox, monetarist path so
far.
From being a technical success, through a phase of attack by global rival currencies, to
becoming a solid bastion of monetary conservatism, it can now be seen as in a radically
changed position under extreme global competitive conditions. Instead of a bastion and
bulwark of other EU aspirations (integration and enlargement ) it can be argued that it is now
a major drag-anchor on EU growth and competitiveness, feeding through to the deplorable
performance on jobs and encouraging the ferocious attacks by neo-liberal governments on the
EU’s social settlement, and, at nation state level, on social wages and social ownership and
social partnership settlements.
A technically successful currency has become a symbol of global financial orthodoxy,
reducing capitalist risk as its global companies and client politicians play the world’s markets.
It is an undoubted advantage to them, and their mainly US parents and hegemons, but no
longer an advantage to Europe, and especially its workers and ordinary citizens.
Objectively a drag anchor and, subjectively, an albatross, the Euro currency invites both rerestructuring as an instrument of economic management, and simultaneously, in public
politics, a symbolic renovation as the beacon of Europe. It is a huge potential asset, a pivot of
the EU system. Already a technical “means of exchange” rival to the US $, a potential oil and
energy currency, it needs a new start as an autonomus force, not a transatlantic client. How
might this be done ?
Politically, the Left has been almost universal in expressing a simplistic opposition to the
Euro, as though it will go away, or the ECB board will, one day, fall victim to social
revolution. We need reminding that socialist economics requires socialist money and assets,
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and aspirations about jobs, social progress and economic growth need policy instruments to
deliver them.
2 A Credible Proposition ?
There are many aspects to political credibility. – common sense, perceived and class
structured senses of injustice/fairness, professional authority amongst the political class, but
specifically on currencies and high financial politics, there is often a strange combination of
deadly secrecy counterbalanced by popular debate and sometimes even due democratic
process ( e.g. the Swedish referendum on the Euro). Secrecy is normally justified because of
the predatory nature of financial speculation, but I do not think this would occur in a lengthily
argued process. As a UK commentator writing about Euro affairs, I would not wish to be
misunderstood when I cite as highly significant the recent revelation that Neil Kinnock and
John Smith (his successor, but then Shadow Chancellor) were going to devalue the £ Sterling
if they had come to office. I make the point simply to illustrate that one does not have to be
radical to consider this policy instrument’s attractions.
My proposal rests on an assumption that open democratic process could see this policy
instrument taking on public credibility. I have no illusion that there are secret considerations
about it at the ECB. But given the nullity of the Lisbon agenda, and the revised Lisbon agenda
as practical instruments of restoring jobs and growth to Europe, who knows where the idea
might take root ? I therefore think that a crucial part of the argument must consist in
common-sense economic and political propositions. Some of these are sketched in the next
section, before looking at the economics of the proposition.
3 Some Common-Sense Economics
While the Euro currency has kept a kind of parity with the globally privileged £ sterling, the
US $ has fallen about 20% against Europe’s currency in just four years. That is a 5% per
annum competitive advantage to the US economy.
To explain in public what this mean may require simply asking the question: if the Euro and
the $ had remained equal, would not Europe’s economy and employment prospects now be
substantially better ?
While wealthy nations’ governments tussle around World Trade liberalisation agendas,
should not there be a more basic agenda emerging in European politics ? Namely, that
Europe’s social model is competing unfairly against the US and UK and global corporations
because the Euro is too high. If popular debate finds its hard to imagine how Europe can
compete with Asia and especially China, given the vast disparities of wage costs, maybe it
would be easier to grasp the practical proposition that Euro for $ and £ Sterling, European
workers are twenty per cent overpriced simply because of their currency. Stated so baldly, a
caveat is needed: similar exchange rates would more than likely have emerged without the
Euro as a common currency. Indeed, the Euro was borne at its then $ parity because some
European corporations wanted to expand globally and wanted to do this cheaply. DaimlerChrysler is one well known story. French and German predations into UK privatised industry
are another.
The Euro has been a technical and, from a government bankers’ viewpoint, a great currency
success. It has achieved stability, helped keep inflation and interest rates low (though I will
contest this view later on), has become attractive as a global exchange currency, has
maintained the massive reserves which it inherited from its member currencies, and helped
governments keep down the cost of borrowing to pay off their debts. Common-sensically,
then, if this currency is a European asset, a great source of influence and financial power, why
could it not be turned to more active uses, supporting Social Europe and jobs? Was not an
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element of the rejection of the EU Constitution connected to a popular sense that the ‘success’
of the Euro and the Treaty rules on its operations were all well and good but didn’t seem to be
helping ordinary people enough ?
Such practical speculation is not an open ended process: the economic clock ticks. If
economic prospects in mainstream Europe are currently poor, why should they not get worse
under fierce global conditions, and with America looking after its own interests under an
aggressive, right wing government pressing neo-liberal politics on the rest of the world ? In
other words, can Europe afford to simply stand still, and hope the best from internal economic
recovery ? Many informed people have taken this view, but been jolted by the long, long
agony of the Japanese economy – despite its continuing export successes. Japan’s experience
suggests that Europe will wait a long time indeed for internally generated ‘endogenous’
growth on a scale likely to impact on jobs and provide resources for a renewal of social
Europe.
I have finally, a quizzical quondam , a perplexed puzzlement, about European governmental
attitudes and establishment opinion’s attitudes towards America.. The basis of this is the
simple perception that the USA does not practise in economics what it preaches to the rest of
the world. The US runs a vast trade deficit, and absorb 20% of total global savings to fund its
debts, has a central bank without a formal inflation target, and a currency which has been
strategically depreciated. It preaches free trade, sound money, balanced budgets. The glaring
gap between doctrine and reality is however recognised, albeit in coded language, by some
economic authorities in their talk about the impending threat of global imbalances: the biggest
agency of imbalance is US political economy. But the European establishment appears blind
to this.
If, on the other hand, the US practised what it preaches to other countries, assisted by its
subsidiary in the London New Labour Government, then a global equilibrium might be
attainable in which economic principles like expanding world trade by cutting trade
protection, increasing aid to the poorest nations, and the wealthy nations concentrating on
future high value added goods might be feasible and advantageous. But these are aspirations
to be pursued from domestic strength, not defensiveness and apologia. World co-operation
needs to be a plus sum game.
Doctrines apart, there are some illuminating economic facts. It needs to be remembered
always that the so called ‘old Europe’, with its ‘unsupportable Social model’ is a remarkably
successful global sector with hour per worker productivity better in many sectors than the
USA’s. EU productivity is as strong as the US’s if hours of work are equated. You can’t undo
that or wouldn’t want to, but the EU’s real industrial and social achievements explain US
fears and, in my view, their hard choice for a $ depreciation strategy. It has hit some asset
holders, but many of them are foreigners with nowhere else to go with their financial
surpluses.
In summary, I believe a public case can be developed around a proposal which,
conventionally, might seem to be regarded as too specialised and too high for popular debate.
4 Insider Politics & Positive Engagement
A strong position in public debate does not mean that there is no inside track. In fact, I sense
that this is where the big difficulty lies because European labour movements have continued
with too close an attachment to the historic compromise struck by the Delors Presidency for a
monetary union in a conservative framework counterbalanced by an activist social
programme.
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The linking heart of the compromise was the stability and growth pact, which proved itself to
be a convenient high form of social partnership based on incomes constraint. Some union
leaders realised, perhaps with more acuity than politicians and activists, that global forces
were going to be very harsh indeed. After all, their members in most advanced industries were
increasingly employed by global companies, whether US, UK, Japanese or European based.
When the social programmes directives were harmonised upwards, they added little value to
the best practise countries, but the argument was essentially defensive: a “level playing field”
meant a bit less internal market competition between workers inside Europe. That may not
have been a bad deal, but with very serious unemployment and miserable growth in the two
leading Eurozone countries, it’s attractions must surely be due for re-assessment. Global
political economy has moved on. The fact is that globalisation has run way ahead of forecasts,
especially in the degrees of competitive pressure and the catch-up productivity of the new
competitor nations. The point is made not to blame that compromise, but to argue for a
recognition that its assumptions no longer hold.
The same applies in other key areas. Although it is big question deserving its own
examination, it can be seen that the social programme as then envisaged may well have run
their main course. Globalisation pressures require new degrees of social protection. Not the
least respect is in it not having produced an independent industrial relations system to match
and counterbalance gains from the strong Euro for the employer/government axis. *2
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The Economic Arguments
These cover a range of technical, explanatory, factual and interpretative points.
Four initial points need to be made.

Firstly, work on likely economic values would depend on a study of Eurozone economic
parameters and elasticities. As far as I know, there is not yet any such official economic
modelling solely for the Eurozone. The Commission’s economics remain studiously
inclusive of all member states, and the ECB appears to operate with only the most
simplistic – and uncritical – of doctrinal consideration.

Secondly, to clear it out of the way, it should be noted that there is no treaty problem
about the global exchange value of the Euro, only the policy targeting of the ECB, and the
entry terms for the new member states. Technically, the Euro floats, though originally it
was meant to have $ parity.

Thirdly, the reserve position of the ECB for the Euro is massively strong. It holds in
Dollars, Yen, £ Sterling and gold and other currencies, plenty enough reserves to manage
and control a policy switch. (IMF statistics to be supplied). China and Japan’s massive
reserves of the US$ are a serious global imbalance, but do not alter thye strong currency
management position of the Eurozone authorities.

Fourthly, in textbooks and amongst commentators the two processes of depreciation and
devaluation of a currency are seen as separate and even mutually exclusive. This is not a
useful approach, since they are in real life frequently part of the same overall process.
What happens, typically, is that depreciations build up over a longish period of time as
global markets find it less valuable to hold a particular currency, and/or that currency’s
authorities decide not to defend its value against pressure. The USA, as the major global
reserve currency, has made a hard choice to allow a major depreciation against the Euro,
and to a lesser extent, the £ Sterling. The US is currently trying to persuade China to
revalue (upvalue) its currency to stem rising imports to the US. Devaluations most often
occur when a government has lost the battle to defend its currency’s exchange value, and
decides, as a policy matter, to simply declare a new lower value, usually after a tactically
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secret decision surrounded by intense and public currency speculation. The declaration
can involve either a new stated value, or a floating band. My proposal involves, maybe
unusually, a currency value lowering from a position of strength, as a hard-nosed policy
instrument.
The macro-economic arguments can be set out as follows:
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My proposal involves an argued case for re-establishing a $/Euro parity, over a period of
time, starting with a symbolically substantial target of between , say, 4 and 6%
devaluation in the medium term , that is, 2/4 years. The indicative effect would be
substantial, and ECB practise would need to change from a studied neutrality about the
Euro’s global value ( except the putative benefits of its strength, of course) to a view that
each time there was pressure from buyers with other currencies to hold Euros, the ECB
would sell to lower the price again. It would not involve printing more Euro notes, since
at this level exchanges of currencies are electronic, but it would make the Euro more
liquid. (More notes would, of course, be needed internally to support a growth of
demand and incomes).
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Part of the impact would come from the changed direction of Eurozone interest rates.
Given that this would be a depreciation from strength, there is no reason why interest
rates should go up. Indeed, to disincentivise outsiders from holding Euro currency and
debt and equity, a downwards direction would be logical.
For readers concerned about interest rates, it should be recalled that for a period of
years when France and Germany and other European countries had virtually negative
real interest rates ( rates of 1 to 2% with similar inflation rates), the ECB still attracted
other countries to hold the Euro with base rates of double this level. (Recently, inflation
has meant that ECB base rates are now low in real terms).In other words, the Euro is not
just strong because it had to prove itself, in its initial period, but it was kept strong by
policy and active management. The Bank for International Settlements 2004/5 Annual
Report confirms this, and explains its doctrinal basis. It also raises my next substantial
point, concerning the likely effect of Euro depreciation on prices. *3
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Conventionally, the big worry about devaluation and substantial depreciation is that it
attracts inflation through increased import prices, wages pressures as workers try to
maintain real living standards, and from increased interest rates. My argument is that the
inflationary fears of the ECB, and the inflation predictions of mainstream economists are
likely to be over-estimated to a significant extent. This is because, by definition through
the high unemployment and low investment levels in the Eurozone, there is plenty of
spare economic capacity to take up the demand blocked off by higher import prices. The
likely export boosting effects would also not be inflationary through competing for
capacity on the same count. Global markets will keep price pressures on too. Interest
rates, because of the depreciation-from-strength stance, would remain the same or be
lower, not higher. I think that a significant price hike is extremely unlikely. A key factor
will continue to be internal competitive pressures inside the EU and Eurozone.
It will, of course, be argued that the oil price hike makes this a bad time to propose a
measure which would make Eurozone oil prices higher. While this is a serious point, the
EU’s unemployment and under performance are very serious too, and no policy other
than increasing the Euro’s value globally can alleviate this high oil price problem on
purely Euro-zone terms. That would be disastrous. Indeed, the opposite argument might
be employed, as a balancing factor. That the high oil price is needed to stimulate a change
in energy policy, something which Europe needs badly to counterbalance the currently
dominant EU policy of marketisation of all energy sources. Further, if there is an active
intention of the EU authorities to engage in oil markets by becoming an oil currency, as
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has been indicated from time to time, the current period of very high and unstable oil
prices is hardly a good one for that scenario.
4 There is a broader dimension to challenging the assumptions of conventional economics,
and noting the absense of a Eurozone economic model at official level. It concerns the
macro-economics of the underlying structures of the Eurozone economy –‘old, Social
Europe’ in counterpoint to the US and UK neo-liberal models. The neoliberal countries
rely massively for growth on private housing markets and, obviously, defence expenditure
for economic dynamics. Their financial services sectors result in large part from the
destruction or absence of advanced state social security. Their job creation is not of core
sable jobs, but of underclass service jobs. Their financial sector create capitalist income
through asset manipulation, not the administration of financial flows to serve economic
producers. The models exaggerate, of course, but the economic models applied in the
economic management world have the same assumptions. Japan’s structural difference
proved Western economics wrong. My sense is that the structure of the Eurozone
economies means that a depreciation/devaluation strategy from strength would likely have
different effects. The SME sector is, for example, relatively autonomous ( ie. not just a
lower tier supplier to big companies) and is numerically and politically crucial in most of
these countries, and it is well known that real job growth will depend on SMEshaving
strong markets to supply. On real and money wages, unions are, in the main, imbued with
collective bargaining conservatism, while militant on social wages and political issues,
and are unlikely to push wages too much if prices do not hike substantially (UK
experience, by contradistinction, from the 60s to the late 70s was that prices pulled
wages). I do not assert this uncritically, and reflect that part of the Eurozone
unemployment problem is that real wages have fallen ( profits have risen as a proportion
of national income) and there has been a basic deficiency of domestic demand. And over
a long period. Like Japan. The Eurozone cold do with some solid growth in real
disposable incomes, both from new jobs and rising wage levels reflecting a higher growth
path.
There is another important point about the differences in economic structures. Contrary to
conventional wisdom, which has been urging flexibilised labour markets on Europe, and
an acceptance of industrial and corporate restructuring, an important report by JP Morgan,
US bankers, has concluded that economic reforms, studied from the 1980s, have been
overrated as instruments for reforming productivity.*4
In short, the ideological war of the economic models has, I believe, a macro-economic
dimension, which needs to be evaluated against conventional economic wisdoms.
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Another crucial effect reflects globalisation realities rather than conventional nation state
macro-economics. It concerns capital export, where overseas profits reside for Eurozone
companies, and domestic investment levels (and, to a significant extent, borrowing costs
for investment). Practically, a lower value Euro would provide an incentive for Eurozone
companies to repatriate profits from exports, and would reduce the incentive for
Eurozone companies to buy up companies outside the zone (as has happened notably
with German and French companies buying into the UK and USA). It would make
outsourcing/de-locations and restructurings outside the zone more expensive, and less
attractive because the lower exchange value Euro would buy less outside the zone. Profits
repatriated would need to be invested, and if asset investments in the financial sector are
unattractive because of low interest rates all the way up the financial system from base
rates, then real investment in new capacity and jobs is likely. A virtuous circle can be
triggered of some substance.
6
Devaluations and strategic depreciations are frequently seen as ‘beggaring my
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neighbour’. That applies in the US case re Europe, but for the Eurozone to expand
substantially would add to global growth. If my arguments about the macro-economics
for the Eurozone hold, there would be a major and welcome stimulus to the world
economy. If a currency value change of say 5% over two years can trigger a higher
growth path from say under 2% to over 3%, the real gain is great and sustainable. On the
other hand, higher import prices against low cost countries, often themselves the
economic agents of global companies, are not going to drag global growth downwards.
Indeed, import volumes in a economic expansion would grow in real terms, but, of
course, more slowly than exports and domestic demand.
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A dramatic turn in macro-economic strategy in the Eurozone would open up many
positive possibilities. New government debt would be cheaper to service. The European
Investment Fund might get properly financed. The still excess Euro reserves might be
activated as a funding line for Euro denominated programmes. On the Growth and
Stability Pact, a re drafting of the rules might have a real economic effect rather than
being political window-dressing for defaults by governments. Unions would need to open
up a real debate about real wages and European collective bargaining, rather than
remaining locked into an out of time settlement. An innovative, rather than a defensive
posture might develop. Governments would need to address savings policy. With low
interest rates, and pressure on pension funds, innovatory approaches to incentivising
deferred wages might be looked at, especially if wage pressures happened for a short
period to exceed price movements. Politically, the Left might be able to launch real
arguments about harmonising corporate taxation and investment incentives linked to job
creation. Constructive engagement might, indeed, replace captured frustration.
*1 ‘Funding the Recovery Programme’, by Andrew Marvell (Regan Scott) was published in ‘A
European Recovery Programme’, edited by Coates and Barratt Brown, Spokesman 1993. It suggested
that one third of the excess currency reserves of the likely Euro zone countries could be used to fund a
big development bond programme for European infrastructure and industrial strategy programmes. Total
reserves of the EU 12 were then £170 billion, compared to an average of about £40 billion for the UK,
US and Japan. The situation today is little different. At the same time Stuart Holland proposed the
creation of the European Investment Fund, not to be confused with the EIB. While this body was
created, as an equity staking European investment fund, it has not been developed to any significant
scale.
*2 In ‘Strategic Unionism & Partnership: Boxing or Dancing:?’, edited by Huzzard, Gregory & Scott,
Palgrave Macmillan 1994.
*3 BIS 75th Annual Report, ‘ The ECB kept its policy rate unchanged, as sub-par economic growoth and
the appreciation of the Euro continued to hold back inflationary pressures’. The same paragraph reminds
us that Japan’s central bank held its policy rate at zero !
*4 Financial Times, 14.10.05. The author ‘s view that structural reforms of labour markets and capital
markets might arrest a productivity fall, but not enhance secular productivity has been reflected by recent
OECD studies.
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