Europe's monetary drama

Spectrezine, 20 November 2004

The euro carries far more baggage than some of its supporters would like to admit, argues Professor Arjo Klamer. Moreover, its undesirable effects will be institutionalised if the proposed constituition is adopted.

In 2003 the conservative weekly The Economist expressed the view that the proposal for a European Constitution then on the table would be better consigned to the dustbin. The new text has done nothing to change this opinion. The magazine's principal objection is that the constitution goes too far in many respects, for example in undermining the sovereignty of the member states. Left and right should unite in opposition to the proposal, as has indeed often happened in relation to European affairs. Anyone who values the social and democratic qualities of our societies will have good reason to view this constitution as a clear step in the wrong direction. The left and the right will only have different arguments to bolster their opposition.

For the left, the problem is the monetary policy that, institutionalised as it would be by this constitution, has in reality prevailed ever since the Maastricht Treaty drew its economic picture of Europe. So what precisely is wrong with the monetary arrangements laid down in the proposed constitution's text?

The charges are as follows...

The constitution specifies a stringent monetary policy controlled by a strictly independent central bank. Democratic control of any kind is practically non-existent. Together with prescriptions concerning the budgetary policy of national and European authorities, this lays the basis for a neoliberal social policy which will in turn lead to further destruction of the social provisions in the member states.

A closer look should also warn us that these elements of the constitution have at the same time created the conditions for a further centralisation of power in Europe as well as a foreign policy dictated by big countries.

Beyond the strictly economic and financial dimensions

It is important to assert that whenever the argument turns to money — which means also whenever we are discussing monetary policy — the political context within which that money operates is crucial. Whenever politicians attempt to inform citizens about the euro, they limit themselves to practical matters, such as the way in which it facilitates cross-border payments or the comparison of prices in different countries. Critics concentrate on the difficulties of the changeover, euro-inflation and similar issues. Sometimes they might go a little further than this and refer to the strength or weakness of the euro on the international financial markets, the varying exchange rate between the euro and the dollar (this began badly, but has in the meantime reached a reasonable level), the strength of the market in eurobonds, and the way in which the eurozone countries held their ground during the Asian crisis. Critics might say that the euro is too strong, or too weak.

But we should be careful. If we confine ourselves too strictly to economic and financial arguments, we shall not get very far with our criticisms. Look a little further and it will become obvious that money is political as well. Money functions only by grace of a strong political system. Whenever money loses its value through runaway inflation, whenever exchange rates collapse, and whenever financial systems descend into crisis, you can be sure that political problems are to blame. A strong currency demands a strong political system. And that is precisely the problem.

The political context

According to Andre Szasz (1), who was closely involved in the negotiations that led to the Maastricht Treaty, of which the formation of a monetary union was the most important aspect, the decision to establish a single currency was never in doubt. The then French President Giscard d'Estaing wanted the Federal Republic of Germany to give up her currency as the price for reunion with the GDR. The French thought to increase their power by these means, especially if they could win control of the European Central Bank, which is why there was so much bickering about the appointment of Wim Duisenberg as the Bank's first president. The French were opposed, and agreed eventually to the choice only because they believed that they had received a guarantee from the Germans that Duisenberg would, after a short period, give way to a French successor. This is just what happened. In the meantime the French banker Jean-Claude Trichet has taken over the bank's leadership.

The decision to make the central bank strictly independent was also a political decision. The thinking behind this is that monetary policy is better handled by technocrats than by politicians, who would be inclined to use the central bank to pursue their own political goals, for example allowing the currency to be put under pressure in order to finance military campaigns or to pay as cheaply as possible for spendthrift policies.

Against this it might be argued that the technocrats are often too rigidly doctrinaire to have much time to consider social problems. They can be too stringent in their monetary policy, with all the undesirable consequences that entails. A well-known example is Paul Volcker who, as chairman of the American Federal Reserve in 1979 put his foot down so hard on the monetary brakes that interest rates soared to exorbitant levels and unemployment rose above 10%, costing Jimmy Carter the Presidency. (Reagan succeeded him.) The left principle here is that whilst technocrats are needed in the application of policy, they must operate under democratic control to the extent that they become inclined to take into account the political and social conditions under which they are operating,

As the constitution now prescribes, the European Central Bank has, as its primary task, the preservation of price stability. In practice this means that the Bank seeks to hold eurozone inflation to a level below 2%. It is unclear why the figure should be 2%, rather than 4% or 8%. In any event this priority means that the technocrats of the ECB spring into action as soon as inflation exceeds this level, slamming on the brakes by, amongst other methods, raising interest rates. This is monetary policy as advocated by the conservative economist Milton Friedman, a stringent approach exclusively aimed at managing inflation.

Socialists and social democrats should surely recoil from such a policy, because what most concerns us is not the management of inflation but rather employment and unemployment. If the price to be paid for lowering unemployment is a little more inflation, then we will gladly pay it. Yet this possibility would be ruled out by the technocrats of the ECB and by this constitution. Should they discover, as Volcker once did, that their anti-inflation policy leads to mass unemployment, they would nevertheless continue along the same course as if nothing had happened. To a certain extent this is already evident. The ECB is exerting pressure in order to maintain an inflation rate of below 2%, while unemployment in euro land stands at almost the same level as the 10% that once cost Carter his presidency.

We know of course that accepting a modicum of inflation in order to force down unemployment is not without its risks, but that need not rule it out. By holding down interest rates and increasing public spending the state authorities can stimulate the economy and reduce unemployment. (Japan and the US have had a reasonable amount of success with this.) Yet such a policy would become impossible under this constitution.

The need for a tighter political union

When the former Dutch prime minister, Ruud Lubbers, and the former President of the European Commission, Jacques Delors, prepared the Treaty of Maastricht, their starting point was the assumption that a strong political union was a precondition for a monetary union. When the fight for a bloated federalistic political union was lost, on what has since become known as a "black Monday" for Dutch diplomacy, the assembled great and good nevertheless went ahead with the monetary union, the supposition being that the common euro would make such a strengthened political union necessary. Their reasoning was that the euro would further centralise power in Brussels and demand a more common approach to social, economic and foreign policies. This has since turned out to be correct.

In order to understand this political dimension, you have to realise how a currency works. A currency needs to win people's confidence. Confidence is everything. We, the users of the euro, must have confidence in its value while the rest of the world must be able to believe in this euro just as they believe in the dollar. What that means is that euroland has to make the Euro real, which in turn requires that it be embedded in a strong political system. The difficulties surrounding the stability pact have made it quite clear that this strength has not as yet been achieved.

The stability pact was supposed to give conservatives confidence in the euro. Participants in the single currency agreed through the pact that they would maintain a balanced budget, at least not allowing their deficit to exceed 3% of Gross National Product. Only a year after the introduction of the euro it turned out that this agreement could not be maintained, when France and Germany — the EU's big boys - found themselves in difficulties, reneged on the deal and found themselves facing no consequences whatsoever. Conservatives, with the Dutch finance minister Gerrit Zalm in the forefront, argued for the inclusion in the constitution of the strict agreements contained in the stability pact, but this was rejected — correctly so, because this would have meant making a conservative economic policy a constitutional obligation! Meanwhile, conservative confidence in the euro had suffered considerable damage.

Even though we do not want a stability pact in this form, political energy remains committed to a euro in which we can have confidence and thus to a strong political union. The constitution is an attempt to found such a union by concentrating more power in European bodies, transferring more democratic competence from the separate member states to the European Parliament, and laying the basis for a common foreign policy. This is what people such as Ruud Lubbers and Jacques Delors believed was needed if confidence in the single currency was to be achieved and maintained.

Why then does one nevertheless doubt that this is the case? There are various reasons, but each is concerned with what might be called the political economy of money. Say the trade unions and employers find themselves in a conflict situation which leads to a spiral of wage- and price increases, something which we have in the past experienced. In such a case political decisiveness is needed if the spiral is to be halted. A central bank president with authority can help, but a successful policy will above all depend on strong-minded ministers with both the power of persuasion and the means to put pressure on both sides. In the Netherlands for this purpose we have the Social and Economic Council (SER) and other governmental organs. In France they have ministries with extensive powers. On the European level, however, no such powerful decision-making institution exists. The EU entirely lacks institutions capable when necessary of acting with strength and credibility.

And what can be done if a state authority within the eurozone spends too much, has no idea how to solve problems affecting its pension system, or is in some other way acting irresponsibly? Once again what this points to is a central power which can call the member state into line, just as The Hague can bring the Province of Gelderland to book if it behaves in an irresponsible fashion. Resistance to The Hague in such circumstances is unthinkable, because the central government has simply too many powers at its disposal. The same goes for the separate states of the US. California is obliged to reduce its deficit whether the state's authorities like it or not because the federal government has the power to force them to do so. Europe's technocrats, including Netherlands Central Bank president Nout Wellink, for this reason warn that more central control is needed, and thus more concentration of powers in Brussels.

This also holds true for a common foreign policy. The US government is obliged to protect the dollar with a forceful foreign policy including military intervention. When foreign debt reaches astronomical proportions, the Americans have no choice but to pursue such a course. They cannot in general allow the situation in the Middle East, with its major stocks of dollars, to get out of control. In order to guarantee the value of their dollar they are forced to act. This costs money, a lot of money, not to mention American lives. By aspiring to create a world currency, the countries which have adopted the euro have committed themselves to the formation and exercise of world political power. This demands a clear common foreign policy and a strong European army, which in turn demands a strong political union, each of which is foreseen in the constitution.

The left's dilemma

The problem for the left is that the logic of the euro demands such a strong political union. Failure to realise this will bring incalculable problems. The PvdA (Dutch Labour Party) has for this reason opted to support the constitution whilst criticising it constructively. (They have always been in favour of the euro, a fact that in the light of the foregoing arguments might be held against them.) In the meantime the social democrats must also recognise that with this sort of political integration Europe's democratic and social qualities can only deteriorate and that this is the price of the euro. Even if the constitution is voted down, we are stuck with this euro and thus with the logic of an ever closer political union and a conservative monetary policy.

What do we want?

Is it possible that a strengthening of the democratic and social qualities of our society could be achieved through the constitution? I cannot honestly see how. In this case the argument goes somewhat beyond the subject of the political economy of money. Now we are dealing rather with the problem of a political union which is too large and too diverse for us to be able to speak of a true political community. A European parliament might in such a case be strengthened, but this would make it no more democratic. This Europe is too big and too diverse for it to be able to have a truly democratic parliament. The distances to Brussels are too great, not only physically but also in an ideal and symbolic sense. The Dutch, Austrians, Danes and Germans do not feel European enough to bother themselves about what happens in Brussels. There is no European news that "we" can share with each other, no conflicts that hold our common attention. Even the conflict over Iraq was not a conflict between citizens, but one played out entirely at governmental level. It was therefore not a democratic conflict at all, for this Europe does not function as a democracy, in spite of its parliament.

This Europe is not becoming more of a social Europe. As I have demonstrated, the institutions responsible for monetary policy, with an independent central bank whose only goal is price stability, compel the Union to follow a neoliberal policy. Add to this fiscal competition, through which taxes are forced ever downwards, and there remains less and less financial breathing space for a social policy. In the Netherlands we have seen the consequences of this, with cuts in spending setting the tone. Even though we have never before been so rich and so prosperous as we are now, we can no longer trust important social provisions. That is not logical, but it is indeed the logic of the euro and of European monetary policy, as well as of the policy stipulated in the constitution.


For anyone who warms towards the social and democratic qualities of our society, this constitution is a real "chiller". A 'no' is therefore imperative, but rejection of the constitution will on its own not be enough. Our society needs an alternative vision, a vision first of all of another Europe. Cooperation is of course a good thing. But the political union for which our current leaders appear to be striving — or is it rather a case of the power sought by a number of member states? — is not one which we can support. A looser connection is desirable, one that makes it possible to work on a stronger and more vital democratic process in societies which can indeed function as political communities. That democratic process is a precondition for a social policy that responds to the feeling for justice and solidarity, the common bond that people in this society still have. And with such a social policy belongs a monetary policy which pays due attention to social conditions.