European Monetary Union: Muddling Through, Falling Apart, Going Where?

Springtime in Athens, Dublin in the fall. Lisbon next time or Madrid? The sparks of public deficits, foreign debt, and soaring risk premiums have lit a fire of fiscal and debt crises in the European periphery that have even inflamed the corridors of Euro-power – the European Central Bank (ECB), the European Commission and the capitals of the European Union (EU) heavyweights of France and Germany. In May, when Greece accepted a €45-billion bailout package, with the usual neoliberal adjustment strings attached, only a few folks on the fringes of the political spectrum speculated about the break-up of the Euro-zone. The recent negotiations between the Irish government and the EU, the International Monetary Fund (IMF), and the governments of Britain, Denmark and Sweden, were concluded with an additional €85-billion worth of credits and guarantees being anted up. But they also have started to raise serious concerns about the future of the Euro.

The Irish Fianna Fáil government of Brian Cowen has had its hands full explaining to angry workers, pensioners and students that they have to take cuts in income to get the bailout money from the EU and that these cuts serve the greater ‘public good’ of saving the banking industry. This is the same problem that the PASOK (Panhellenic Socialist Movement) government of George Papandreou in Athens is dealing with. And the Portuguese and Spanish governments are also attempting to convince international investors, the EU, and the IMF that pre-emptive spending cuts will overcome their fiscal crises without foreign bailouts. At the same time, the rich and powerful in the centres of the Euro-zone are concerned. The convenient practice of dumping most of the costs of economic crises on workers in the periphery, so that workers in the centres feel safe from income and job losses, doesn’t work as smoothly as it did so often in the past. Protests and strikes flare up from Athens to Dublin but also Paris and London where governments turned to austerity without IMF advice. German workers, who are told the crisis is over, are deeply suspicious about the security of their jobs and incomes. Many also feel misused as paymasters of the EU and wish their beloved Deutschmark might have a comeback.

Responses to Fiscal Crises

Unrest and unease among European working classes causes concerns among the propertied classes. Will they be able to squeeze enough money out of their subordinates to socialize the losses incurred during the Great Recession? Or do they actually have to write off parts of their asset-inflated wealth? Conflicts over responses to fiscal crises in the European periphery and about the future of the Euro are all part of the larger question how to tackle the still unsolved crisis of the capitalist economy. The shorthand answer of the propertied classes is austerity; working out the details is left to their political personnel. And so they try.

Some suggest establishing a European Monetary Fund, modelled after the IMF, to help member states over liquidity problems and enforce structural reform deemed necessary for long-term growth. A related idea is the issuing of Euro-bonds that would complement the European Monetary Union with fiscal capacities independent from ad-hoc decisions of its member states. Others suggest, analogous to defaulting private companies, some kind of sovereign default. Such ideas notoriously avoid the question of who would carry the losses of actual default. With an eye on the enforcement of austerity measures, it has also been proposed to tie member countries’ voting rights within EU-institutions to certain deficit or debt thresholds. Countries exceeding these limits would lose their voting rights. The furthest reaching idea is, of course, to quit membership in the Euro-zone and reinstitute a national currency.

The EU-summit last week tried to dissipate such ideas by pledging allegiance to the Euro. To support these diplomatic claims, EU member states agreed to turn the ad-hoc funds that were created during the bailout negotiations with Greece in the spring into a permanent stand-by fund to solve liquidity problems that emerge in the course of fiscal and foreign debt crises. Economically, this IMF-style fund doesn’t solve the uneven development of the European centres and its periphery, which is, together with a world-wide overaccumulation of capital, the root causes for such crises. Even the political unity that was demonstrated at the summit is more than threadbare. Just a day after the summit the governments of Britain, France, Germany, Finland, and the Netherlands announced their plan to reduce the EU-budget. With one per cent of the EU’s GDP, such plans won’t have much economic impact but will inevitably lead to a clash between net payers and net receivers within the EU. The latter comprise not only deficit countries of the Eurozone but also Eastern European countries that aren’t members of the monetary union. Thus current conflicts over crisis management within the Eurozone will translate into stirrings in the EU as a whole.

The jumble of technocratic economics and nationalist ideology that prevails in public debates over the future of the Euro make it very difficult to find the fault lines and breaking points along which the Euro crisis developed in the first place. The history of European integration since the 1980s suggests that the EU, and the Euro-zone more particularly, has generated systemic macroeconomic imbalances: a bloc of surplus countries centred on Germany on the one side, and a deficit bloc in the Mediterranean periphery on the other. It should be noted, though, that the latter also includes Frances, which is, by any standards, a political and economic key player within the EU.

The Great Recession of 2008-09 pushed the weakest economies of the deficit bloc into combined fiscal and foreign debt crises. The economic crises in the European periphery also generated political tensions between France (in deficit) and Germany (in surplus). No matter how hard President Nicolas Sarkozy and Chancellor Angela Merkel are trying to downplay their differences, the jack of disintegration has sprung from the Euro-box. The world economic crises has also transformed into a political crisis of the Euro-zone. It has the potential to affect the whole of the EU, and thus opened possibilities for radical challenges to the ECB and the EU’s Growth and Stability Pact.

One Country’s Surplus is Another’s Deficit

Table 1: Deficit Bloc

Current Account Balance
(in % of GDP, 2010)
Public Deficit
(in % of GDP, 2010)
GDP Growth 2010
(in %)
GDP Growth 2001-2010
(in %)
Share of Euro-Zone GDP
(in %)
Greece – 10.6 – 9.6 – 4.2 2.3 2.5
Ireland – 1.1 – 32.3 – 0.2 2.6 1.7
Italy – 3.2 – 5.0 1.1 0.2 16.8
Portugal -10.7 – 7.3 1.3 0.6 1.9
Spain – 4.8 – 9.3 – 0.2 2.1 11.5
Slovakia – 2.9 – 8.2 4.1 4.8 0.7
Slovenia – 0.7 – 5.8 1.1 2.7 0.4
France – 3.3 – 7.7 1.6 1.2 21.2
Average – 4.7 – 10.7 0.6 2.7  Total: 56.8

Table 2: Surplus Bloc

Current Account Balance
(in % of GDP, 2010)
Public Deficit
(in % of GDP, 2010)
GDP Growth 2010
(in %)
GDP Growth 2001-2010
(in %)
Share of Euro-Zone GDP
(in %)
Austria 3.0 – 4.3 2.0 1.5 3.1
Belgium 1.7 – 4.8 2.0 1.4 3.7
Denmark 4.5 – 5.1 2.3 0.7 2.5
Finland 1.3 – 3.1 2.9 1.8 1.9
Germany 4.8 – 3.7 3.7 0.9 27.1
Luxemburg 8.4 – 1.8 3.2 3.0 0.4
Netherlands 5.2 – 5.8 1.7 1.3 6.4
Average 4.1 – 4.1 2.5 1.5  Total: 45.1

Source: European Commission

Persistent balance-of-payment imbalances between today’s Euro-zone countries go back to the 1980s. Following the end of fixed exchange rates and the world economic crisis of the 1970s, internal European imbalances developed in parallel, and partly overlapping, with global imbalances among the major economies of the U.S., Germany and Japan. By and large, members of today’s Euro-deficit club (see Table 1) were already in the red in the 1980s. The surplus group bloc has, in contrast, expanded its membership: in the 1980s, it only comprised Belgium, Germany, Luxemburg and the Netherlands; today it also includes Austria, Denmark and Finland (see Table 2). Sweden would be part of the surplus group, too, if it had joined the monetary union. The business media and neoliberal think tanks often present these newcomers as proof that European integration allows countries to leave deficit and debt traps if governments make the right policy choices.

Yet, the economic success came with a price tag. For a long time the new surplus countries were strongholds of social democracy and welfare capitalism. But faced with the threat of speculative attacks and financial crises, such as the ones non-Euro countries Britain and Sweden encountered in the early 1990s, the social democratic parties in these countries decided to embrace competitive corporatism as a way to integrate organized labour into export-oriented coalitions with domestic capital. Belt-tightening in the name of rising exports cost social democrat parties voters and eventually led to the formation of far-right parties, many of which are capitalizing on today’s Euro-crises. The developments in the Netherlands are a good example. In their efforts to defend the country’s surplus position, Dutch social democrats, in tandem with the Christian Democrats, used up much of their political capital. As government party 1989 – 2002 and again 2007- 2010, the Dutch Labour Party implemented a series of austerity measures and tied the unions into corporatist agreements to keep inflation low. Yet, the employment gains that were promised as the eventual result of these policies didn’t come. The party’s electoral base was irreparably eroded. The political vacuum left was filled by Geert Wilders, the rising star of far right politics in Europe.

Voters that stood firmly on the side of social democracy in the past clearly distrust social democratic claims to manage international competitiveness in a more socially just manner than conservative parties. Whenever and wherever such Third Way policies were tried since the early 1990s, electoral defeat followed suit. Yet, the starting shot for such policies wasn’t fired in the small Scandinavian or Benelux countries but in France. Torn between expectations of many of their voters and its communist coalition partner to stick to left-Keynesian policies, on the one hand, and pressure from domestic and international capital to turn to austerity, on the other, the French Socialists opted for the latter in the early 1980s. Mitterand’s turn opened the way for a highly profitable restructuring of French corporations, but this never translated into current account surpluses for the aggregate economy. France was a deficit country in the 1980s and again through the 2000s. Only temporarily, in the 1990s, did the French turn a current account surplus. The reasons for this lay with Germany, and it also lifted a couple of other deficit countries, Italy and Ireland, briefly into the surplus zone.

The Central Role of the Deutschmark

The accession of formerly state-socialist East Germany to capitalist West Germany, generously paid by a government’s one-time spending spree, caused a positive demand shock that benefited not only German capitalists but also their competitors in neighbouring and other foreign countries. For a while it seemed that Germany’s expanded domestic market and political focus on German integration would tie down its export power, taking competitive pressures off its neighbours. Yet, there were also concerns that Germany would develop a greater appetite for political power after unification. Some EU countries, namely France, saw monetary union as a means to neutralize such appetites. The German government tried to calm its neighbours’ concerns but was also keenly aware that sacrificing the Deutschmark, the ultimate symbol for peace and prosperity in (West) Germany, would be extremely unpopular at home. The solution to this problem was to invent the Euro as renamed Deutschmark. France and other EU partners got the monetary union they wanted but had to swallow German Bundesbank policies as the terms and conditions for attaining the Euro. The German state got the satisfaction that the Bundesbank rules that had underpinned Deutschmark hegemony since the 1980s were now officially recognized as guide to monetary union.

German corporations, moreover, found themselves in a win-win situation. Accession of East Germany had created a zone where union contracts were the exception rather than the rule. Like U.S. corporations who migrated to Southern right-to-work states in the 1980s to break union power in their Northeastern heartlands, German capital jumped at the chance to pit largely unorganized workers in the East of Germany against their better-organized fellow-workers in the West. The result was wage restraint that no other capitalist class in Europe could match.

Under conditions of flexible or managed exchange rates, the resulting competitive advantage for Germany could have been, at least partly, compensated by devaluations. Under conditions of monetary union this was no longer possible. Unfettered by exchange rate adjustments, wage restraint in Germany from the early 1990s on boosted exports into the Eurozone on an unprecedented scale. Current account surpluses surged. Even the global financial crisis of 2008-09 hit Germany only mildly. Just a few countries in Europe – the members of today’s surplus bloc – could keep up with Germany’s renewed export power. Two factors distinguish these countries from members of the European trade deficit bloc. One is the already mentioned corporatism. Even if it didn’t produce the same wage restraint as the German mix of corporatism West and union-free zone East, it allowed companies in those countries not to lose complete sight of their German competitors. Moreover, smaller members of the surplus club renewed their industrial capacity at roughly the same time as Germany, and they share tightly integrated production networks with its bigger neighbour. Among the deficit countries only France matches productivity levels of the surplus countries, but to the dismay of capitalists all over Europe, France doesn’t share their capacities for wage moderation. The other countries of the deficit bloc have neither corporatist traditions, nor do they have the same levels of industrial capacities as the surplus countries with their position in international production networks at the low end of the value added chain.

The economic and political conditions that allowed Germany and a few others successful beggar-thy-European-neighbour-policies were well known at the time the European monetary union was negotiated. The question, then, is: why did the governments of the deficit bloc countries agree to terms for monetary union that didn’t leave much space for their economic development?

In the case of France, after a phase of industrial restructuring in the 1980s, French capitalists thought they were ready for competition in the Eurozone. The French government was willing to accept the monetary union under almost any conditions as long as some kind of neutralization of Germany’s real or perceived political clout could be expected. In the smaller peripheral countries, their ruling classes agreed for different reasons. As with all capitalists they were, and still are, concerned more with the accumulation of private wealth than their national states and their internal social conditions. The prospect to convert their domestic investments from a devaluation-prone national currency to a European hard currency looked too good to be ignored. Moreover, the Euro promised deeper integration into European supply chains and higher profits. As it turned out, they were right – but not with all the results they expected.

After the Euro-negotiations concluded with the Maastricht Treaty, domestic and foreign investments in the periphery increased substantially. These investments partly paid for the integration of production capacities into the European supply chains and partly for real estate purchases that, in turn, fuelled an American-style housing and consumer credit boom. The problem was that the European periphery attracted mostly standardized parts of the supply chains that add less value to the final product than the technology-intensive parts which continued to be concentrated in the German core. While productivity and profits for the whole production process increased, productivity development in the periphery lagged, competitiveness deteriorated and their trade balance turned negative. For a while, capital imports and the demand-generating effects of the housing bubble could offset the deterioration of peripheral exports. But when these bubbles burst, following the U.S. subprime crisis of 2007-08, credit and domestic demand froze, banks failed and governments eventually picked up the bill, transforming the crisis of capitalism into a fiscal crises of the European periphery.

Austerity and Alternatives

Fiscal stimulus and almost unlimited injections of liquidity from the ECB, alongside similar measures by central banks and governments in other parts of the world, helped to contain the recession of 2008-09. At that point, Europe’s ruling classes considered the violation of the neoliberal principles enshrined in the ECB-constitution and the EU’s Stability and Growth Pact a price worth paying to save European capitalism. Since then the ECB has paid lip service to its principles, but its actual monetary policies have remained fairly loose. European governments, however, turned to austerity. Some, like the Germans, have done so voluntarily; others, like the Irish and the Greek, involuntarily, and under pressure from the ECB and the Germans. Whether expansionary macroeconomic policies offer a long-term solution to today’s economic problems is questionable. But it is absolutely certain that austerity exacerbates these problems immediately in the short-term. The austerity measures that were imposed on Greece and Ireland, along with the pre-emptive austerity being adopted in Italy, Portugal and Spain, have already led to severe political tensions between Eurozone governments. They have also triggered a wave of strikes and protests in the deficit countries.

Meanwhile, governments in the surplus countries such as Germany are presenting themselves as the saviours of the Euro and, importantly in the fuelling of populism, keeping tax-payers’ money in their own countries. The underlying logic implies that European deficit countries are in the red because they are populated by lazy workers and run by wasteful governments. Kick their butts and they will work as hard, and export as much, as the highly efficient workforces in the surplus countries do.

Die Linke members protest against the German government’s austerity measures.

This ‘boost-exports-through-austerity’ strategy will not work. A single small country might achieve export success on the backs of wage cuts of its workers and attacks on the welfare state temporarily. But after a while the export stimulus that wage restraint can buy will be outcompeted by technologically more advanced production capacities in the core. Past experience within the Eurozone, and the EU at large, proves this point sufficiently. With the whole group of deficit countries being pushed to austerity, it is not likely that even temporary export success will be achieved because, as a group, these countries represent a significant part of Eurozone production and income. And if peripheral exports do not increase and their domestic demand is being restricted by austerity measures, the exports of surplus countries may well shrink, too, knocking out any semblance of a European recovery.

The danger that austerity in the periphery poses for another recession across the Eurozone is rarely understood; but suspicion and anxiety that the recovery might not last and fears of job loss are rampant across Germany and the other European surplus countries. Indeed, these sentiments have helped fuel the recent successes of far-right parties in Austria, Belgium and the Netherlands. In the absence of convincing progressive solutions to the combined crises of capitalist economies, public finances and European integration, alarming numbers of people from all social classes have been turning to crude economic nationalism of different sorts. This popular ferment corresponds with the charges that the European periphery is populated by lazy people with an insatiable appetite for fiscal transfers from centre countries. It also reflects elite considerations that it may be necessary to reintroduce the Deutschmark and invite satellites like Austria and the Benelux countries to form a Deutschmark bloc that would keep crisis-ridden European deficit countries at bay.

Considering the austerity pills that doctor Euro has prescribed to Greece and Ireland, and threatens to administer to Portugal and Spain, anti-Euro attitudes in these countries are quite understandable. The disease has not been diagnosed properly, the cure is far from promising. Britain never joined the Eurozone, and it is Downing Street that has ordered its brutal austerity. What is needed at this time is an effective coordination between struggles in different countries in general and between peripheral countries and EU-key player France in particular. On the one hand, France also is a deficit country and thus faces some of the challenges that small peripheral countries are grappling with. On the other, its size gives it a much stronger punch vis-à-vis the surplus bloc than peripheral lightweights – if popular movements can force the French government to strike out. A second challenge for European labour movements and the left is to build coalitions between deficit and surplus countries. After all, many workers in the latter think they have to make sacrifices to the benefit of Irish and Greek slackers but don’t realize that they are effectively bailing out the rich who had invested in the periphery. A substantial part of the bailout money just pledged by the EU and the IMF flows back to the surplus countries, just not into the pockets of the mass of taxpayers who mustered those monies in the first place. Instead, it is safely funnelled into the bank accounts of the rich in those countries. The part that stays in Ireland and Greece helps the rich in those two countries. Workers are screwed in all countries. •

Background Readings:

  • Bieler, A. (2006). The Struggle for a Social Europe: Trade Unions and EMU in Times of Global Restructuring. Manchester.
  • Carchedi, Guglielmo (2001). For Another Europe: A Class Analysis of European Economic Integration. London.
  • European Economists for an Alternative Economic Policy in Europe (various years). Euromemorandum, at
  • Grahl, J. (1997). After Maastricht : A Guide to European Monetary Union. London.
  • Habermas, J. (1991). “Yet Again: German Identity – A Unified Nation of Angry DM-Burghers?” New German Critique, No. 52.
  • Lombard, M. (1995). “A Re-examination of the Reasons for the Failure of Keynesian Expansionary Policies in France, 1981-1983,” Cambridge Journal of Economics, Vol. 19.
  • Lapavitsas, C. et al. (2010). The Eurozone Between Austerity and Default. Research on Money and Finance, SOAS Occasional Report, September 2010.
  • Ross, G. (1981). “What is Progressive About Unions? Reflections on Trade Unions and Economic Crisis,” Theory and Society, 10: 5.
  • Schmidt, I. (2009). “New Institutions, Old Ideas: The Passing Moment of the European Social Model,” Studies in Political Economy, N. 84.
  • Schmidt, I. (2010). “European Capitalism: Varieties of Crisis,” Alternate Routes: A Journal of Critical Social Research.
  • Wolff, R. D. (2010). “The Keynesian Revival: A Marxian Critique,” Alternate Routes: A Journal of Critical Social Research.

Ingo Schmidt teaches Labour Studies at Athabasca University. Recent books include Reading 'Capital' Today: Marx After 150 Years (with Carlo Fanelli) and The Three Worlds of Social Democracy: A Global View.