Part 1: The German Space of Accumulation
The present state of affairs in the Eurozone and in the EU reflects the partition of the European Union into three groups.
The first is a group of neomercantilist countries centred on Germany and formed by Holland, Belgium, Austria and Scandinavia. Their neomercantilism can be defined as a strong one because of their persistent export surpluses — realized mostly within Europe, given the trend of rising deficits with Asia not offset by the fluctuating surplus with the United States. The group’s external net balances do not depend much upon the nominal devaluation of the currency. The net position rests on the combined effect of maintaining a powerful capital goods industry, linked through Germany to global oligopolistic corporations, while macroeconomically displaying a very low long-run growth rate. Germany is not the locomotive of Europe. From the 1970s Western Europe systematically displayed a much higher growth rate, thereby stimulating the exports from Germany and from its economic satellites. Hence the neomercantilist group epitomizes a classical monopoly capital situation, turned into a macroeconomic institutionalized setup by the very process of la construction européenne wanted by France.
In the past Germany aimed at stable exchange rates to avoid competitive devaluations. In the context of a single currency such an objective mutates into competitive wage deflation. Domestic stagnation ensures that German wages grow less than productivity. The country’s contractual system, based on a neomercantilist entente with the Trade Unions, enables the gap between productivity and wages to be more favourable to capital compared to the rest of Europe. All this leads to low growth in Germany, reinforcing its export competitiveness by means of wage deflation. The end result is that while Europe cannot do without German machinery and technology inputs, Germany is not a fast expanding importer, thus it does not contribute to net European demand. It thereby accumulates very large external surpluses that are used to finance FDI and joint ventures in China and elsewhere, as well as to buy shoddy US financial papers as happened with the Landesbanken bailout.
The second group of countries is the inner European periphery headed by Italy. Firms in Portugal, Spain, Greece would like to generate net exports but they can’t because, their export growth notwithstanding, they have a weak domestic capital goods sector, so that any sustained expansion in national income has a rising import content. The import dependency on technology sectors and also on durable goods is such that past pre-euro devaluations did not help improve the external position of these countries. Both Spain and Greece, but not Portugal, experienced higher-than-EU-average growth rates. Spain’s growth was due to the insertion of the country into the international real estate market via London. In the case of Greece the fiscal deficit enabled to sustain an import-oriented growth. In both instances the growth of domestic demand led to higher activity entailing yet more imports per capita. Notice that were it not for its world financial sector, Britain would belong to the persistent deficit countries of the inner periphery. Italy, on the other hand, has often been a net exporter. But its best net export performances occurred when the Lira devalued relatively to the Deutsche Mark. With the Euro the net external position deteriorated sharply, turning negative in 2005. Italy’s symbolizes the weak form of neomercantilism dependent upon real currency devaluation. Italy thus belongs to the inner periphery since its international position was linked to a weakening currency. All told, the Euro has restricted the European space of Italian capitalism.
The third group is constituted solely by France: a very special case. It has a pronounced neomercantilist posture but it seldom achieves it. It is the largest net export market for Germany and increasingly so for Italy. From 1980 France attained a net external position only in the aftermath of the collapse of the EMS in 1992-93, losing it four years after the formation of the Euro. Unlike Italy, France, because of the weight of its financial sector, tried to avoid the route of competitive devaluation. The plan for a common euro-currency was essentially a Mitterrand-Delors one as a means to get around the failed neomercantilism and exercise control over Germany’s monetary policies. The peculiar position of France is relevant to the present crisis.
Part 2: Euroland in a Dead End
Consider now the fact that since the 1970s Germany has had a deliberate and successful policy to keep its own growth rate well below that of the rest of Europe with the precise objective of piling up financial surpluses. France too is not very keen on sustained growth because successive governments, including Mitterrand’s, fear wage demands. Finally Italy can grow if favourable exchange rate conditions prevail since public sector spending ceased to support the country’s growth already in the late 1970s. Under these circumstances it is hardly surprising that in Western Europe growth rates declined during every single one of the last 4 decades. Europe has been falling more and more in the grip of German surpluses, the only bright spot being net exports to the United States which, however, hardly compensate for the growing deficits with Asia. The formation of the Euro has completely crystallized the situation and enabled Germany to reach unprecedented surpluses in a context of deepening European stagnation. When the US outlet ceased to function in the wake of the subprime crisis which cascaded on the derivative papers held by the Landesbanken, Germany hardened its neomercantilist stance and unilaterally decided to rewrite the rules of the game.
The Greek crisis is just the route chosen by Berlin to modify the code of conduct to the detriment of France. As such there is no problem of an excessive Greek deficit. It can easily be handled at the European level by devising common policies to revamp European and specifically Greek growth, as it is the only cure that does not kill the patient. Drastic cuts in public expenditure, while disarticulating the whole system of services and infrastructure on which a modern society rests, reduce the debt ratio only marginally, if at all. But from Berlin’s neomercantilist perspective a cooperative option is not even remotely contemplated for the following reasons.
Germany sees the Eurozone as a fixed exchange rate system good only to prevent competitive devaluations (in the past the most damaging and effective devaluations came from Italy). For Germany the no transfer clause enshrined in the Maastricht-Dublin-Amsterdam Treatises must be kept in place since the essential role of Western Europe is to provide net effective demand for Germany’s exports. As Wolfgang Munchau reported in the Financial Times of March 21st: “Rainer Brüderle, economics minister, said last week there was nothing the government could do about demand because consumption was a decision by private individuals. A senior Bundesbank official even compared the eurozone to a football league, in which Germany proudly held the number one slot.” The comparison is patently false: to compete with Germany, Eurozone countries would have to reduce their own growth rates well below Germany’s, which means that they will have to be zero or even negative. It is this “gestalt” that pushed Sarkozy to confront Merkel, although he did it much too late, only after the German government lost the majority in the Bundesrat following the elections in North-Rhine Westphalia on May 17th.
The hardening of the German stance towards Greece and the Iberian countries is due also to Berlin’s focus on its own outer periphery in Eastern Europe, including the Baltic countries, which are in a total depression, and the deeply recessed Slovakia and Hungary. It is an open secret that, although refusing to confirm it, the ECB has been buying their bonds as collaterals for loans, thus absolving Austrian and Swedish banks from their reckless lending behaviour. It is done with the full support of Berlin. Germany’s opposition to helping out Greece is part of its policy to allocate moneys to areas that are Berlin’s satellites zones and to the areas of German companies’ restructuring strategies, as is the case with Eastern Europe.
After the North-Rhine Westphalia elections, France compelled Berlin to accept a 750 billion-euro fund. Some prominent figures, like Romano Prodi on the Financial Times of May 21st, heralded the decision as a step towards European fiscal federalism. It is nothing of the sort. At best it is an emergency fund, and a very opaque one at that, being structured in a special investment vehicle the content of which is unknown. Its toxic-instrument-type nature points to the gravity of the situation and thus highlights its inadequacy. This explains why the phantom fund is not placating markets.
Expectations are being made worse by the race to the bottom generated by the German-spawned Greek crisis. Each country is taking austerity measures that will make recovery a very fortuitous event. Furthermore the conflict between Germany and France is being narrowed to two competing, yet similar, budgetary rules for the European Union: the German plan based on its own terrifying balanced-budget law and the brand-new French proposal of a trajectory towards a balanced budget. They will both sink upon hitting the rocks of intra-eurozone asymmetries and of the worsening social crisis leading to large tax revenue losses.
Joseph Halevi is Senior Lecturer of Political Economy at the University of Sydney. This article was first published in Re-public on 23 June 2010; it is republished here with the author’s permission.