Spanner in the works
International Viewpoint #248 September 1993 that are responsible for unemployment, as statistics clearly show. Indeed, it is actually those countries and regions where salaries are highest that consistently have the lowest unemployment rates.6
The responsibility belongs to those who make decisions about investment, about its size and orientation. Investments aimed at rationalisation eliminate jobs instead of creating them.
It is rather amusing to see how the heralds of the "market", including
But the workers movement must above those who are for stock market deregulation, are now denouncing meanall have nothing to do with any notion of spirited speculators. But if speculation played a role in the July crisis it consensus around defending "national competitiveness", on whose alter they are asked was more a consequence than a cause. The EMS effectively cracked to abandon their own interests. This is a underneath the pressure of the recession and the crisis of public finances.
game that working people and the oppressed lose before it can even get started.
CLAUDE GABRIEL — Paris, August 18, 1993
No resistance can be put up to threats of relocating production centres if this so-called national imperative is accepted. Multinationals will always find a country in which salaries and social programmes are the lowest, and thereby impose an endless spiral of social regression.
To respond along nationalist lines to
Maastricht and post-Maastricht is suicidal.
The only effective response is the unity in action of working people and the oppressed of all countries, as opposed to class collaboration with the bourgeoisie, whether national, European or international.
Durable links should be made between union activists, beginning with those working for the same multinational. Our forces should be united for a radical reduction in the workweek without a reduction in salary
— the only way to effectively fight unemployment.
We should not hesitate to confront European institutions with specific social and democratic demands - backed up by the real forces of the organised workers movement across Europe. But priority should be given to agitation and direct action against unemployment, in defense of immigrants, against racism and fascism and for the strengthening of solidarity with the peoples of the Third World.
These are not easy tasks, but this is the only way to stop the retreat and the disarray.
We have to begin by winning some partial battles. Current trends can only be reversed through practical successes. The success of the June 12 Assembly of the European Left
— for a European alternative of labour, solidarity, reason and heart — is a first step in this direction. Other such steps must follow
— and they will. *
6. Six of the seven countries with the highest wage levels (Switzerlqnd, Luxembourg, Denmark, Holland, western Germany have the relatively lowest unemployment rates.
HE old rules have been replaced by a kind of pseudoEMS: the margin of possible fluctuation of each currency in relation to another has gone from 2.25% above or below a pivotal rate to more than 15% around the same rate. In other words, the former regulated discipline has been replaced by the free-floating of currencies (within a range of 30%) with the hope that governments will discipline themselves.
The main actors - governments and central banks — first displayed an optimism based on the belief that this new range of fluctuation would curb the monetary disorder and return currencies to their previous standing. However, there is nothing accidental or passing about July's events. They have led to a re-evaluation of exchange rates within the European Community and have, more importantly, led to the suspension of the rules of monetary
These are big developments. They have thrown a spanner in the works of the policy of convergence contained in the project of Economic and Monetary Union
(EMU). They may lead to an abandonment of the financial and economic discipline that was meant to lead to total integration. From now on, certain governments can, following in the steps of Great Britain and Italy, choose to "competitively depreciate" their currencies in order to make their products more attractive to export markets.
With this in mind, German Chancellor Helmut Kohl evoked the "very strict conditions" that made up, according to him, the criteria for convergence. In the same spirit, French Prime Minister Eduard Balladur declared that, "it is an error to hope to build economic and monetary union when economic policies diverge."
While the march towards a common currency requires a rapid divergence of economic performance, we have seen the contrary over the last few months. Each state is plagued by specific problems and contradictions: Germany is paying the costs of unification and must maintain high interest rates to attract holders of capital and hold down inflation; Belgium has not been able to curb its public debt;
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International Viewpoint #248 September 1993
France has seen its budgetary deficit grow; Spain has a 22.5% rate of unemployment and a public deficit of 1,700bn pesetas!, and so forth.
Stagnant Britain
Even John Major's government has not been able to reverse the general tendency in spite of gains made through devaluating the pound by more than 20% in relation to the French franc and the German mark — no significant upturn had been registered in Great Britain. Globally speaking, the Brussells Commission forecasts an average 0.5% decrease of production for the whole Community.
To simply attack speculators or, as some have done, criticise the "liberalism of the Maastricht Treaty" (that is, of the EMU) is merely a way to get around denouncing the barbarism and the foolishness of an entire system. Indeed, it is even nonsensical as far as Maastricht is concerned, since the project of a single currency aims at, among other things, eliminating monetary disorder in the Community.
In the meantime, the EMS was to be a transitional instrument inasmuch as it would create a stable monetary system somewhere in between that of a single currency and that of a generalised flotation of exchange rates. The EMS worked as a disciplinary framework which was to avoid competitive devaluation and determine "adjustable fixed parity". It was meant to impose financial virtue on the different states. With the EMS, the Community took on several objectives: limiting unmanageable short-term fluctuations and simplifying commercial exchanges and investments within its orbit; and progressively reducing the margines of exchange to ultimately achieve fixed rates.
From that time, in an ideal world where each country would have the same level of debt, the same public deficit, the same rate of inflation and the same interest rate, it would be possible to work from a "common till" and create a single currency.2 This ideal gave birth to the criteria of convergence, a kind of guide indicating the direction to travel (see box on follo-
But during this transition, the free circulation of capital allowed by the Single Act always risks coming unglued under the impact of political and economic events and can compromise the whole EMS with too much activity on exchange markets. This is exactly what has just hap-
The recession has combined with the international globalisation of financial markets and the growth in the circulation of capital within the EEC itself. Since relative exchange rates were regulated within the EMS, national governments applied to the system of interest rates the freedom of action that they previously had with their currencies. Increases in interest rates (beginning with the increase in German interest rates) became the main tool for each state to intervene to try and control the "main criteria" of inflation, the balance of payments and the total mass of money. The dynamic unleased by this deepened recessionary tendencies by limiting access to investment and consumption credits.
The battle of interest rates can in this way artificially increase the value of a currency if capital flows into its market. This is what happened to the Spanish peseta, thereby restricting progress made through the increase in exports and then leading to the devaluation of September 1992.
In contrast, the British government decided to attempt "in isolation" an economic upturn through the growth of credit. It had to pursue an interest rate policy, but in a way opposite to that of the other countries: lower them significantly in exchange for leaving the EMS and devaluating the pound
But you cannot go on playing with interest rates while pretending to expect nothing to occur in the area of monetary parity. The Maastricht Treaty said that there should be no further exchange rate readjustments in the two years leading up to monetary union. According to the calendar set up by the European Council, 1994 was to be the final stage for an eventual modification of relative exchange rates.
Given the persistent economic imbalances and the unequal effects of the crisis on the countries of the Community, everyone was expecting this final correction to take place at the beginning of 1993, particularly for the Italian lira, the Portuguese escudo and, without a doubt, also for the peseta and pound stirling. The market anticipated this probable decision and began to speculate in September 1992 on the "programmed" drop in the value of these currencies. In so doing, it accelerated movement and at the same time removed the Community's ability to control the process.
Virtuous Germany?
The events of July 1993 have added new elements to the crisis. Germany was meant to play the role of the virtuous model, something which it is not now in the areas of inflation and publid debt. This country now has an inflation rate of 4.5% and the Kohl government is planning to reduce public spending by 25bn marks in 1994, 21bn marks of which is to be cut from the federal budget itself.
For its part, France has dug itself into a deep recession coupled with a considerable budgetary deficit, which will reach 330bn francs or 4.5% of GDP. At the same time, the productive investment of firms continues to decrease along with internal demand. Meanwhile, the "least virtuous" countries that left the EMS and devalued their currencies - Italy and Great Britain - have consequently got the upper hand in the area of export competition, thus further aggravating the French crisis. This time around, the French franc was not able to escape devaluation in relation to the German mark. Indeed, the franc was the primary target in this most recent speculative and monetary battle.
Thus, for holders of capital there was a great probability of crisis in the EMS, a system which does not free the individual states from their respective political and social responsibilities. With such a deep recession, each state is trying to find the recipe for avoiding a dangerous erosion of its social, economic and ideological authority.
At the same time, none of the various instruments of intervention are genuinely independent for there is no possible national response. What a government gains, for example, in the area of internal credit and consumption, it loses in the area of foreign debt after weakening its currency through a too rapid reduction of its interest rates. On the other hand, an obsession with the public deficit and debt leads to high interest rates which suffocate internal demand.
This is why the French government has been turning in circles for weeks and why its prime minister has adopted enigmatic expressions to describe the maintenance of high interest rates in defense of the "strong franc". The price to pay: a deepening of the recession and unemployment.
At the current level of crisis, the capacity of the central banks to intervene is progressively reduced. The Bundesbank spent 90bn marks in September 1992 to defend the Italian lira and the British pound. And this July it spent 60bn marks to "defend" the market parity of four other currencies, including the French franc and the Belgian
1. About $14bn.
2. This would imply a "perfect market" in which identical mobility existed for capital and the work force. We know however that the European Community cannot repeat American history. It does not have the independent and sufficient budgetary means to cushion the local shocks. It has much less, for example, than Germany on its own, which spends 20% of its GDP to carry out unification. The mobility of labour in Europe is also hampered by cultural and linguistic problems
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Criteria for European convergence
1. The achievement of a high degree of price stability. The rate of the growth of prices for consumption can be at the very most 1.5% higher than the average
International Viewpoint #248 September 1993 rate of the three least inflationist countries.
is in the process of playing on the European economies. The error, of course, would be to believe that only Helmut Kohl and a few others are affected by such hijinks. The free and legal activity of a Soros aggravates economic chaos and feeds the
2. Manageable public finances. The ratio between the needs of financing public administrations and the Gross Domestic Product should not surpass 3%. The ratio between public debt and Gross Domestic Product should not surpass 60%.
3. Respect of the normal margins of fluctuation forecast by the EMS over at least the last two years. Each country should therefore not have devalued its currency outside the 2.25% margin.
4. The durable character of the convergence. One year before entry into monetary union, long-term public interest rates should not surpass by more than 2% the average interest rates of the three least inflationist countries.3 * franc. Germany ended up renouncing the use of its own reserves and the printing of money in defense of other currencies for fear of an increase of domestic inflation.
The new monetary agreement facilitates the task of central banks who in the old-rules EMS were obliged to intervene to keep all the currencies of the Community within their respective margin of fluctuation. They had to buy or sell currencies to keep rates within a range of 4.5%. In the new situation, these limits are only formal because each currency now has a "freedom" of 30% around its pivotal rate.
The "market" knows all this and anticipates. At least, this is the idealist presentation of the matter. But the "market" happens to be nothing more than a collection of financial institutions who have no reason to lose money. Indeed, they are generally given exactly the opposite task: to make money! It comes as no surprise that the American George Soros played with some $10bn over three days to make $1bn in profits or that Steve Hanke used his
Canadian pension funds a few months ago to make 500% profits by "breaking"
The system is actually quite simple: you "play" by taking a loan in the currency that you plan to weaken on the market by putting it up for sale; then you pay back the loan after having re-sold the same currency, but at a lower rate in relation to the "strong" currencies that you got in the resale. In the process, you pocket the profits.
Easy, yes, but the cost of admission to such a game on the speculative markets is now enormous. Everyday, almost $1,000bn change hands on the exchange markets. This is much more than the central banks can throw into the balance.
The last ten years have seen an intense diversification and a deep-going internationalisation of banking operations. This market is open 24 hours a day. It is computerised, decentralised and uncontrollable.
In these times, a George Soros can get on television and annouce the big joke he current social crises. From this point of view, Soros and his ilk are true assassins. But this financial mafia need not worry in a world where the law is precisely that of profit accumulated in such a fashion.
The monetary turbulence was also fed by firms which, worried about the resilience of their treasuries to the impending monetary instability, sought to change the composition of their reserves. This was also the case of "non-residents" holding shares in the French, Spanish and Belgian public debts in the form of state bonds and who bailed out before the currencies in question could depreciate.?
The monetary earthquake underlines the seriousness of the current socio-economic crisis. To begin with, the schema was essentially the following: a reduction of inflation that allows for a reduction of interest rates and then a way-out of the recession through a growth of investments and consumer credits, and finally the reduction of the public debt. At the same time, this "competitive deflation" was meant to restore the competitivity of firms which have to control their costs (particularly salaries) and increase their self-financing capacity, given the high cost of bank credit.
For the moment, though, the depth of the recession itself has spoiled all these calculations since it adversely affects both ends of this linear reasoning, in that it weakens demand and makes productive investment that much more risky.
In October, a European Council meeting is going to take place, and it will cer-
3. For example, to mention only those currencies fixed to the German mark, Belgium today has a public debt equal to 129.4% of its GDP; and the Netherlands has a budgetary deficit of 4.4% of GDP and a debt equal to 78.4% of GDP.
4. The Belgian franc, even if it is fixed to the German mark, has not escaped attack as a result of the depth of the recession in the country. On July 29, it fell 1.35% below its pivotal rate in relation to the mark, although usually it does not do so by more than 0.30%. The Bank of France, for its part, spent some 250bn to 300bn in foreign currencies — primarily borrowed marks — to defend the franc. It now has to rebuild its reserves. It is in part because of this weakening of the holdings of central banks that a range greater than 15% was chosen, a range wide enough that it limits the risks of another obligatory intervention of mutual solidarity of the kind that the EMS imposes on paper. New attacks on one or several currencies would therefore provoke devaluations.
5. In normal times, only 7% of this amount involves currencies of the EMS. In July, however, the proportion was much higher.
6. It is quite incredible that negotiators in Brussels (governments and central bank governors) had to reach agreement before 1 o'clock in the morning - before the opening of the Tokyo stock market!
7. Non-residents hold 500bn francs of the French debt in the form of bonds. Many among them have no interest in keeping such unstable holdings.
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The stages of the Maastricht Treaty
The first phase is now underway. It was meant to be the phase of harmonising the countries along the criteria for convergence. The second phase was to begin on January 1, 1994 with the setting up of a European monetary institute: there is growing convergence, but changements of parity are still possible at the begin-
International Viewpoint #248 September 1993 tainly "congratulate" itself for the ratification of the Maastricht Treaty by all the member countries! But it is now an established fact that not a single one of the governments has been able to meet the famous convergence criteria set out two years ago. Not one, for example, has managed to stop the growth of its public ning of this period.
December 31, 1996 was meant to be the final date for deciding the conditions debt nor that of its budgetary deficit.
and final date for moving to a common currency, that is to say to the third
On average, the interest on public debt phase. The establishment of a European bank and a "system of national central banks" is supposed to be set up by July 1, 1998 at the very latest.
represented 3.1% of Gross Domestic Product (GDP) among EEC countries be-
January 1, 1999 is set as the final step: introduction of a common currency for tween 1974 and 1983. This figure was the countries which have crossed all the obstacles! At that time, the other coun-
5.2% in 19928 tries will have to request membership under new conditions. * and 10.7% for Italy.
As regards budgetary deficit, it is above 3% of GDP in all countries except
Luxembourg. Between 1990 and 1992, the public deficit of the Germany-France-
Benelux-Denmark group went from 3.1% to 4.7% of GDP. The average would be, for the entire EEC, 6.25%. Worse, certain countries which in 1990 remained within the limits set by Maastricht no longer did so in 1992. This is the case of Britain,
The phenomenon of significant state indebtedness is certainly not new. But today the global deficit of public administrations is almost everywhere higher than what it should be to allow for stabilising the debt and payments on it. As a result, there has been a snowball effect and governments hardly have any room for manoeuvre, and do not have the means for a stimulating an economic upturn through public spending
Governments are trying to get out of this fix with privatisations, which they no longer even bother to clothe in liberal ideology. Nobody hides the fact that it is simply a matter of finding money!
It should be recalled that the second phase of European Union was to begin on
January 1, 1994. This phase is meant to put in place a European monetary institution that strengthens cooperation between the central banks and favours the coordination of economic policies! That would mean establishing a quick and definitive stabilisation of exchange rates at the beginning at the beginning of the second phase. The events of July have spoiled this schedule somewhat.
After having first pretended that the schedule would be respected, people like
Helmut Kohl finally raised the probability of a delay in the calendar for monetary
We have spoken many times in these pages of the stakes involved with the
EMU for European governments: the race against the dangers of recession and against international monetary instability;
and the urgent need of exchange rate stability to keep up with the growing scope of trade within the EEC. The EMU is in part, and from the point of view of the general interests of capitalism, a corrective to the "liberalism" of the Single Act of 1986, and not the opposite?
But if there is a need to bury the EMS and the Maastricht, there is also a need to quickly bury the "big market" and the Common Agricultural Policy (CAP). Lest we forget, the real origin of Maastricht is the Single Act!
In 1992, the proportion of exports destined for other EEC countries was 62.7% for France, 55% for Germany, 58.4% for Italy and 56% for Britain. If we include the countries of the European Free Trade Association (which includes non-EEC West European countries such as Sweden, Austria and Switzerland) the share of exports destined for other European countries countries is clearly even more spectacular: 68.9% for France and 70.2% for
This is a worldwide phenomenon of growth of trade between the most industrialised countries, which mutually exchange equipment, finished products and technology. But a specifically European dimension has been added, especially after the signing of the Single Act. According to Community statistics, trade between the twelve signatory countries has gone from 35% of their total trade in 1958, to 49% in 1980, to 60% in 1990.
This is the main contradiction. Can such commercial dependence survive within the framework of floating exchange rates? Can the industrial bourgeoisie contine along this - rather profitable - path while having lost guarantees on the rate of
This is unlikely - thus the need to choose between two possible alternatives. On the one hand, the needs of trade and the fear of the collapse of the whole system can win the day and governments will try to stick to their previous objectives by agreeing to a different pace.!! On the other hand, the whole things could collapse and the Single Act and the CAP would explode.12 There cannot be free circulation of capital and goods in a situation of monetary chaos. 13 Such a situation could only lead to national protectionism and to chaotic battles with the background of "worldwide globalisation".
Insofar as the project of Economic and Monetary Union remains essential for the general interests of capitalism, the second scenario - entirely possible in the current international context - would provoke a series of important crises of politics and states.
There is every reason to treat the events of July with the utmost seriousness. The next European Council meeting will take place on October 29. It will doubtless have the task of redefining the old boundaries of monetary and economic union. But even more seriously, European governments will have to revise their social and budgetary policies.
It is in this area that working people and the unemployed will be made to pay for July's monetary crisis.*
8. Outside Portugal and Spain.
9. Certain reformist opponents of the Maastricht Treaty forget to point out that the freedom of circulation of capital and the disappearance of exchange controls date from the signing of the Single Act and not from the project of monetary union. The problem is that many among them (in Denmark, France and Italy, for example voted in favour of the Single Act and never gone back on this decision.
10. This does not prevent a number of journalists from speaking of German plans to make a solo turn towards Eastern Europe!
11. There is certainly talk of a smaller EMU with certain countries - but which ones? - and London is floating its idea of a common "hard European currency unit" (ecu) circulating parallel to national currencies. This solution actually just adds another step but doesn't solve anything with respect to the transitional and thus unstable character of the EMS - unless exchange controls are reintroduced.
12. This was quickly confirmed by the German request for agreement on "green" prices. After the flotation of currencies the Bonn government fears a loss of revenue for its farmers.
13. It was wrong to present the EEC of the Single Act and the big market as a simple free trade zone. Until now, the discipline of the EMS has made it a much more structured and regulated arrangement.
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