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No currency without democracy

Miri Davidson21 July 2015

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The euro will fail long before the financial markets and Germany allow for its progressive reform. If we are to create a new euro, we need to accept that the EU as it stands "is actually a huge system of political larceny", writes Frédéric Lordon for Le Monde Diplomatique.


By Frédéric Lordon


Many people, especially on the left, still believe the euro can change, that it can be transformed from a euro of austerity into a renovated, progressive, social euro. That will never happen, and you could guess as much from the lack of political control that is the result of the institutional paralysis of the European monetary union.

The euro in its present form was created by a structure that has given, and was designed to give, full satisfaction to the capital markets and has allowed them to gain control of European economic policies. Any attempt to change the euro significantly would be an attempt to dismantle the power of the financial markets and exclude international investors from the formulation of public policy. The markets will never accept any project clearly designed to deprive them of their disciplinary role. As soon as any such project gained political weight, it would start a storm of speculation and a market crisis, allowing no time to set up an alternative monetary structure and resulting in immediate reversion to national currencies.

The choice for those on the left who persist in believing reform is possible is between indefinite powerlessness and the advent of what they say they want to avoid — reversion to national currencies as soon as any reform initiative starts to be taken seriously. By the left, I do not mean the (French) Socialist Party (PS), which remains linked to leftwing ideals only by semantic inertia, nor the amorphous mass of Europeanists who have just discovered the flaws in their ideal and are horrified to realise it could soon fall apart. But making up for a long intellectual slumber will take time. The rush for rescue has begun in slight panic and total unpreparedness.

The ideas on which the Europeanists place their last hopes—eurobonds, “economic government” and even the democratic “leap” of President Hollande and Chancellor Merkel (you can just hear the Ode to Joy)—are illusory solutions for those who have never asked any questions and are unlikely ever to understand what’s going on. Maybe it’s less a matter of understanding than accepting that the EU is actually a huge system of political larceny.

What has been stolen is popular sovereignty. The right wing of the left, who are fanatically pro-Europe, dislike all talk of sovereignty. It has never occurred to them that sovereignty (meaning sovereignty of the people) is another name for democracy. Do they mean something else when they talk about “democracy”?

Denial of democracy

The denial of sovereignty in Europe is an unconscious denial of democracy. To make people forget this loss, the Europeanists claim there will be a dangerous retreat into nationalism. There is much fuss about the French Front National’s success in opinion polls, but nobody wonders whether this might be connected to the destruction of sovereignty, not as the mystic exaltation of a nation, but as the power of a people to control their own destiny.

What is left of sovereignty in a structure that has deliberately chosen to neutralise economic policies—budgetary and monetary—constitutionally, making them subject to automatic rules of conduct set out in treaties? Those in favour of the Treaty Establishing a Constitution for Europe (TCE) of 2005 pretended not to see that the main argument against it lay in Part Three. This had been a part of the treaty since Maastricht (1992), Amsterdam (1997) and Nice (2001), and each of these had reaffirmed the suppression of the central requirement of democracy: that public policies should be reversible and subject to re-evaluation.

When everything is set down once and for all in irrevocable treaties, there is nothing to be re-evaluated, let alone discussed. Monetary policy, manipulation of budgets, levels of public debt, forms of deficit financing: these key economic levers have all been set in stone. How can there be any talk of desirable levels of inflation, when inflation has been made the responsibility of an isolated, independent central bank? How can there be any discussion of budget policy when the “Golden Rule” has been laid down? How can debt be repudiated when member states can no longer get finance except on the capital markets?

The Europeanists don’t have any answer to these questions (indeed they implicitly approve this constitutional state of affairs), so their feeble ideas always overlook the central issue. The PS has been talking about economic government of the Eurozone for the last 20 years, but what can that mean when there is nothing left to govern, everything governable having been locked away in the European treaties?

Aggravating the political flaws

Eurobonds (see Eurobonds), presented as a great leap forward through financial sophistication, have none of the properties their inventors ascribe to them. Germany, which enjoys the lowest interest rates when it borrows on the markets, sees very well what backing the countries of southern Europe would cost. If it accepted that price for the sake of pursuing the European ideal, it would surely demand (in return for participating in the financial mutualisation) extra, draconian powers of supervision over and interference in national economic policies, just as it placed restrictions on those policies, through treaties and pacts, when it joined in the monetary mutualisation.

Far from reducing the political flaws of the present structure, eurobonds would aggravate them to an unprecedented degree. Germany would not agree to enter into the financial solidarity mechanism of a mutualised debt, and foot the bill if one of its partners defaulted, without demanding, through the intervention of a strengthened Commission, far-reaching and permanent supervisory powers, and a procedure for placing erring partners under supervision. Tighter automatic constraints and troika supervision are the only likely results of eurobonds—a worsening of the political crisis Europe already faces.

This generalised dispossession of sovereignty is attributable to Germany. It is the only acceptable solution to Germany when it comes to sharing an economic and monetary destiny with nations it judges incapable of exercising their sovereignty except to bad effect. Hence it advocates general neutralisation. Only Germany’s sovereignty is left intact, and transplanted into European economic and monetary institutions.

The frequent and stereotypical horror at any questioning of Germany’s actions reveals a great deal about the horrified. As is often the case with inverted racists, whose exaggerated protestations of friendship allow them to avoid analysis, it may be that those who are most vexed by the German question are those who profess to love Germany.

Germany’s cult of the euro

Between loving and hating Germany, there is room for objective analysis of structural characteristics and historical heritage, and of the compatibilities or incompatibilities encountered when trying to get different countries to live together at a high level of integration. Germany has fostered a cult of the euro, giving the euro such a central role that it is unable to make the slightest concession. Germany only agreed to join the euro on condition that it would be able to dictate the euro’s institutional architecture, based on its own.

Germany believes that the hyperinflation of 1923 prepared the way for Nazism (although it is far more likely that the deflation of 1931 was responsible), and acts accordingly. Nobody can blame Germany for its history, or for believing in the stories it has told itself to explain that history. Nobody can blame Germany for having a unique vision of what a monetary order should be, and for refusing to enter into any order that differs from that vision. But it can be criticised for imposing its obsessions on everyone else. And while it is legitimate to allow Germany to pursue its monetary obsessions, it is also legitimate not to wish to pursue them with Germany—especially if those principles are unsuited to the economic and social structures of the other member states and may be disastrous for some.

Some member states need devaluation, others need to allow their deficits to grow, to repudiate part of their debt or to allow inflation. Every state needs these things to become legitimate subjects for democratic discussion. But Germany’s principles, which are written into the treaties, forbid that.

There is nothing at all to be hoped for from the democratic “leap”. The reactivation of a federalist project is highly uncertain—nobody has said what it would involve, and nobody has considered the conditions that would make it possible. Can the advocates of greater federalisation describe the miracle that would persuade Germany to accept that all the questions it has worked so hard to exclude from democratic debate should be readmitted to it? And do they believe that a federalism in which discussing these issues is still prohibited by the constitution would represent a democratic “leap” (1)?

Let us suppose that a fully fledged European federal democracy has been established, with European legislative powers worthy of the name, with two chambers, enjoying all the normal prerogatives, and elected by universal suffrage. Can those who dream of “changing Europe to overcome the crisis” (2) imagine Germany abiding by the decision of the European majority if this sovereign parliament were to decide to retake control of the central bank, allow monetary financing of member states, or remove budget deficit ceilings? Their reply—obviously “no”—would be the same (we hope) if European majority rule were to require France to privatise its social security system. What if France had imposed its own model for social security Europe-wide, as Germany has imposed its model for monetary order, and made it the object of an ultimatum?

Debate and majority decision

The architects of federalism need to realise that the democracy is not just made up of formal institutions, and that it cannot thrive, or even exist, without a foundation of shared sentiments, since this alone can persuade the minority to accept the decisions of the majority. Democracy is debate followed by a majority decision. The senior civil servants (and economists) who have no political sense, yet make up the greater part of national and European political personnel, cannot see this. Their intellectual inadequacy is responsible for institutional monsters, ignorant of the principle of sovereignty. The democratic “leap” looks as if it will disregard the emotional conditions necessary for democracy, and the difficulty of satisfying those conditions where many nations are involved.

Given that reversion to national currencies would fulfil all these conditions, and would be technically practical provided it was attended by appropriate auxiliary measures (especially for the control of capital) (3), it is clear that the European project is not entirely hopeless. There can be no single currency since that would require a proper political structure, which for the moment is out of reach. But the idea of a shared currency is worth pursuing, especially as there are still good reasons for Europeanisation, providing the disadvantages do not outweigh the advantages.

The balance would become favourable once more if, instead of a single currency, there were a shared currency—a euro with national denominations such as the euro-franc and the euro-peseta. These national denominations would not be directly convertible into other currencies (dollars, yuan), nor among themselves. All exchange, external and internal, would go through a new European central bank, which would act as a bureau de change (see Convertibility) but would have no authority over monetary policy. This authority would be returned to national central banks, and governments would have to decide whether or not to retake control of these.

External conversion, limited to the euro (4), would take place in the normal way on the international exchange markets, at variable rates, but via the European Central Bank (ECB), which would be the only player for European agents, public and private. Internal conversion, among the national denominations of the euro, would take place only via the ECB, at fixed rates, decided by governments.

This would rid us of the intra-European forex markets, subject to repeated crises under the European Monetary System (5), and protect us from the extra-European forex markets. These properties would constitute the strength of the shared currency.

Once the myth of automatic convergence of European economies was dispelled, it would become possible for economies that need to devalue, especially during the present crisis, to do so. A system of internal convertibility of a shared currency would allow devaluation, under controlled conditions. The experience of the 1980s and 90s shows the impossibility of orderly forex adjustments in the midst of a storm on the fully deregulated financial markets. The internal calm of a European monetary zone freed from forex markets would make it possible to devalue by political processes, and it would be up to the member states to agree a new parity grid.

Back to Keynes

An internal convertibility system could be configured like the International Clearing Union proposed by John Maynard Keynes in 1944, which, apart from allowing countries with major external imbalances to devalue their currency, would also have obliged countries with major surpluses to re-evaluate. Such a system would compel member states to re-evaluate gradually, according to a series of surplus thresholds (set at 4% of GDP, then 6%). Germany would long ago have had to agree to an appreciation of the euro-mark, supporting demand in the Eurozone and helping to reduce internal imbalances. The rules for forex rate adjustment would make up for the predictable unwillingness of countries with surpluses to cooperate in negotiations.

Orthodox neoliberals cry inefficiency or inflation as soon as there is any talk of devaluation. Yet devaluation is what they constantly advocate, though what they plead for is internal devaluation, through lower wages (and unemployment, which depresses wages), rather than external devaluation of forex rates—structural adjustment rather than adjustment of monetary parity. If the Germans were to leave the euro, they would soon realise this. A decade of wage restraint would be wiped out in two days by the re-evaluation of the neo-deutschmark.

Inflation, which would require structural adjustment rather than monetary parity adjustment, is just a bogeyman when there is a far greater threat from deflation (a general fall in prices), which is at least as dangerous and which would necessitate controlled reflation, if only to reduce the burden of debt.

But surely this lightening of the debt burden would be overshadowed by an increase in the burden of external debt, caused by devaluation? A devaluation of 10% against the dollar would make the burden of dollar-denominated debt 10% heavier. (Note that in France, as Jacques Sapir has shown, 85% of the debt has been issued under contracts governed by French law would be redenominated into euro-francs, so that devaluation would have no impact.)

But the issue of a shared currency goes far beyond simply restoring the option of devaluation, which, at present, is a vital freedom, but not a universal remedy. Leaving the current euro is much less a matter of macroeconomics than of asserting popular sovereignty—the basic condition for democracy.

A scaling down of European ambition

If the emotional preconditions for popular democracy at a supranational level are still out of reach, realism demands that the European ambition be scaled down, although this does not mean abandoning it altogether. It should (to counter any accusations of retreat into nationalism) be pursued vigorously in all areas other than economics. As to the economic ambition itself, we must decide its scale. It should not involve 28 or even 17 member states: that would guarantee failure. The number should be based on objective assessments of compatibility, assuming a minimal degree of homogeneity of lifestyles—the same, or a similar, way of thinking on social models, concern for the environment—and a prior agreement on the broad principles of economic policy. Such coherence is probably out of reach for all but a small number of member states at present. It can sometimes be assessed on the basis of convergence indicators, though not those of the Maastricht treaty.

If the goal were to create a large market as a basis for the shared currency, it would be important to admit only economies with similar socio-productive models and similar cost structures. Only countries whose minimum or average wage was at least 75%—or some other appropriate proportion—of the average of the minimum or average wages of the other member states would be admitted. This complete reworking of the European structure would be an opportunity to be rid of the madness of monetary and financial orthodoxy, of across-the-board structural adjustment, and of the evils of non-distorted competition, which accommodates structural, social and environmental distortions, and is designed to encourage them to exercise their maximum violence.

The idea of replacing the present euro with a reformed and progressive one is hollow. If it were progressive, the financial markets would never allow it. The choice is between remaining bogged down in a liberal euro, slightly modified by a few second-rate ideas, and a head-on collision with the financial markets, which are sure to win, though they will ultimately lose everything, since their victory will destroy the euro and create the conditions for its reconstruction on lines that will exclude the markets.

A forced reversion to national currencies will seem like a failure and will have politically depressing effects, hindering for a time any attempt to re-launch the European project. That is why the likelihood of an eventual re-launch depends on the manner of leaving the euro. Setting aside political energy to tide Europe over the interim period of national currencies would imply backing the idea of a shared currency—provoking the explosion of the markets by announcing this plan and presenting it as the political ambition of some European countries, rather than presenting reversion to national currencies as the only possible outcome of this confrontation. It will not be possible to avoid reversion to national currencies, but the way in which that return takes place will determine the chances of any future euro.

Unless Europe slips forever into the coma of the antisocial euro, this reversion will come. That is the penalty for having a structure unable to adapt because it has deprived itself of all freedom to change. The only options for a super-rigid structure are to resist as long as the external shocks it faces are not too powerful, or to break.

Europeanists will protest that Europe is making progress. The European Financial Stability Fund (EFSF), the European Stability Mechanism (ESM), the purchase of sovereign debt by the ECB (6), banking union: all these are advances—won at considerable cost, but real. Unfortunately, and unsurprisingly, none tackles the heart of the structure, that hard core from which come all the depressionary and anti-democratic effects, including the exposure of economic policy to the financial markets, an independent central bank, an anti-inflationary obsession, the automatic adjustment of deficits and a refusal to countenance their monetary financing. So the advances remain peripheral, only mitigating where possible the disastrous consequences that the hard heart produces. Europe goes on addressing the effects, without tackling the causes. It remains incapable of fundamental reform and unaware that a break-up is the only possible outcome. 

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Eurobonds

Eurobonds are a mutualisation of public debt in the Eurozone. The various sovereign debts, up to 60% of the GDP of the member states, would be considered as undifferentiated European debt, for which all the member states would be collectively responsible. If one member defaulted, the others would act as guarantors. Under other proposals, sovereign debt over 60% of GDP would be mutualised. It is above 60% that the guarantee effect is most useful—but also most likely to be called on.

Convertibility

A Spanish company that needed to pay a French company would have to ask the European Central Bank—or its network of agencies, or ordinary banks handling foreign exchange functions on its behalf—to convert its euro-pesetas to euro-francs at the fixed exchange rate in force.

A US company that needed to pay a bill in France would convert dollars to euros on the external forex markets, at the current fluctuating rate, and would then ask the European Central Bank to change its euros into euro-francs at the fixed euro/euro-franc exchange rate.

If the euro-franc fell by 5% against the euro, it would naturally fall by 5% against all other national denominations of the euro and the dollar. A French company would then have to pay the ECB 5% more for the euros it needed to pay the same bill in euro-lire or dollars.


- Frédéric Lordon is the author of Willing Slaves of Capital

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