In Europe, the US and even the emerging, less developed countries that should be the beneficiaries of the international redistribution of work, there are significant sections of public opinion tending to withdraw behind protectionism.
Dani Rodrik was the first to note, in a penetrating piece of work[1], that globalisation increased people’s insecurity and their demand for greater protection, in precisely the same moment when the broad consensus in Washington was for a shrinking of the welfare state so that developed economies could compete with emerging ones where capitalist production was being relocated. According to Rodrik, the gap between demand and offer of security would end up undermining consensus for free trade.
How can workforces be discouraged from retreating behind national boundaries and the ensuing general collective impoverishment when they are motivated by the need for security and managed by the opportunists of politics? There is only one answer: strengthening supranational governments, in continents and the world. The argument used by protectionists (let me be frank: by fascists because fascism and war are the ultimate tools for regimenting closed nation states) is that there still are no supranational governments and we will all be dead by the time they ever come. According to this reasoning, instead of progressing towards political unity of the human race, we should – at every obstacle – take a step back into barbarism.
In a system of sovereign nation-states – the situation in Europe of the first and second industrial revolutions – those countries that were first to achieve economies of scale and other competitive advantages were calling for free trade (Adam Smith, the Manchester School and laissez-faire capitalism). Other countries that, owing to fragmentation of the market or held back by other factors, were unable to develop a competitive industry, tried instead to unify their market and to counter the former countries with a broad idea of defending nascent industries (Friedrich List, the Zollverein and German unification).
The main instrument for protecting national industries was in applying customs tariffs, which now generally survive at the outer edges of huge trade areas and at very low rates. In the first stage, Nations played a useful and necessary function for setting up national markets and providing them with guidelines and rules but, already by the second stage, the size of the market (the Lebensraum- “living space” in the propaganda of the Third Reich) was by now continental. Only the larger countries could continue to sustain their own growing workforces. European countries, small and weak, instead of federating as had been proposed by enlightened liberal thinkers (Einaudi) and socialists (Trotsky)[2], opted for customs barriers and their fatal outcome, war. The so-called élites, although aware of the need to create a broad, single European market, were unable to imagine anything other than imperialism and colonialism to achieve such a market without sharing their national power.
Only after the terrible and pointless massacres of two wars, which made European countries subject to the law of the two winning countries – the US on one side and the Soviet Union on the other side of the Iron Curtain – in western Europe there became established, laboriously and not without generous “incentives” from America, the grand design of the European Federation, still not completed.
In 1954, the European Defence Community and the ad hoc Assembly which, in the proposal by De Gasperi and Spinelli, should have assured its political control, were rejected by a handful of votes from the French Parliament.
The endeavour was resumed by focusing on the unification of the market. The European Common Market was little more than a customs union and a lot less than a Federation. It had a Parliament without powers made up of those appointed by national parliaments. The common currency of the area was the US dollar, to which each European currency was individually pegged. One of the permanent legacies of this experience is the shared awareness by Member States that pegging their currencies to the dollar is incompatible with maintaining unity in the European market.
The dollar was an unstable anchor, governed purely by the requirements of American state policy. As illustrated by the Triffin dilemma, a surplus of the US current account resulted in a dollar shortage in the rest of the world, while a deficit (as has occurred since 1982) caused dollar inflation (a “paper pyramid” in Guido Carli’s definition). Exchange rate volatility between each European currency and the US dollar produced much wider fluctuations in the exchange rates between European currencies (cross rates). Some were better able to comply with dollar pegging (there was already a Deutschmark area in the common market), while others resorted to continuous devaluations. Those countries that created, one after the other, the Currency Snake, the European Monetary System (EMS), the European Currency Unit (ECU), the Economic and Monetary Union (EMU) and the Euro, had decided to lay down their arms and cooperate. Among the weapons in the old arsenal of economic policy that were decommissioned, competitive devaluations had to be included of necessity.
Competitive devaluations undermine market unity even more than customs barriers since an exchange rate fall is applied to all transactions in foreign currency, while tariff protection can discriminate between categories of goods, services and transactions (for instance, it can limit protection purely to infant industries). However this means that long queues of lorries, trains, ships and aircraft form at customs points for inspections, obstacles that are incompatible with the volumes of trade and production specialisation achieved in the Common Market.
With the abolition of customs tariffs, protecting national industries could only be done through the exchange rate which, for three decades, was the real threat to unity in the European market. Market integration between countries with different currencies individually pegged to the Dollar also encouraged speculation on an enormously destructive scale that reached its maximum “success” with the attack by Soros on the pound sterling and the lira in 1992 and with the apparent defeat of the European Monetary System. To many it seemed, in that moment, that the entire European project had been delivered a mortal blow. Instead, a few years later, economic and monetary union was achieved through a currency that was not just common but the only one.
Is economic and monetary union completely without criticism? Certainly not. At the time of the crisis, which began with the American financial crash of 2007 and has continued to the present day, only the monetary part of the Maastricht Treaty had been implemented, but without the complementary reforms in the banking and financial sector. Nothing had been done to complete the EMU with its economic arm, a common budget of the countries that unified their currencies, to integrate monetary policy (by nature, technical and neutral) with that of the budget (which is, instead, political, democratic and operator of choices). No steps had been taken to deal with a frenzied speculative attack against the public debt of the Union’s weakest country, Greece, by the same American banks that had fuelled that debt and hidden it by subterfuges (in other words, “derivatives” as they are officially known). No strategy had been prepared to prevent the financial crisis from reverberating on sovereign debt and that a crisis in sovereign debt would allow speculative attacks aimed at dismantling the Euro, the only impediment, after the dissolution of the Soviet Union, to the Dollar Empire reigning supreme and the “end of the story”.
Today we have a European stability mechanism associated with budgetary discipline, we are on the way to completing the Banking Union (although still missing the Single Resolution Fund and the Deposit Guarantee Fund), and we are concretely debating, in institutional settings, the question of the Eurozone budget which should make it possible to address the most immediate challenges: security and immigration, development and employment.
Political union, which should be the premise for all these achievements, remains instead the goal of a process that Mario Albertini[3] defined as “constitutional gradualism”. At a time when the security of citizens and the survival of the union are at stake, it seems dangerous to still be resorting to “mechanisms” – dear to the Germans – for hiding from public opinion the creation of a real and transparent European power through the sharing of – now imaginary – national sovereignties. Nonetheless, the outcome of the referendums in France and the Netherlands, the drift towards nationalism in East European countries and the spread of xenophobic movements in all Member States, make it seem unreasonable to consider the proposal of gambling on the life or death of the European project in a sort of Russian roulette consisting of repeated referendums. Time needs to be taken and used very well, with the total and intensive usage of the instruments already available, to bring the Union back to the citizens, on the major issues of security and the economy, before gambling with the acquis communautaire with bets whose outcomes are often decided by internal political moods.
Quantitative Easing began in the US, where the Fed launched a series of programmes for purchasing government securities to enable the federal government to finance the budget deficit, no longer covered by purchases of Treasury Bonds by public investors (private investors had eschewed them for many years).
After 1971 when the dollar lost convertibility into gold, the US ensured that the world was organised with a floating exchange rate system decided by the market (and thus again by the US – according to the neo-liberalism project – to ensure their financial system remained dominant). Countries could no longer devaluate their currency to help their exports, but the country that issued the reserve currency could allow it to revaluate, bringing about its scarcity and/or increasing the interest rates compared to other issuers or otherwise devalue it by means of excessive borrowing and low interest rates. Therefore QE, by influencing the exchange rate, brings competitive devaluation back into play, no longer between individual nation states but between major monetary zones. This example is limited to the BCE-Fed, but the same could apply to the BoE, BoJ, PBoC with no change in the conclusions.
The European Central Bank is the only federal body in power because the European Parliament, despite having its powers considerably extended, is still not able to properly counterbalance the Council (intergovernmental body) to give the Commission the necessary support. The ECB has had to take action, in exceptional circumstances, to save the Euro “whatever it takes” without having the corresponding political power and, worse, with nineteen quarrelsome political impotencies and with another nine EU Member States outside the Euro. It can be assumed that, in 2012, the main motivation for the ECB’s intervention was to avoid that a speculative attack on the public debt of one or more Member States could put at risk the single currency, and thus the single market and the EU itself. Among the “secondary” effects there was certainly the one of avoiding an excessive appreciation of the Euro against the Dollar.
The succession of QEs, both sides of the Atlantic, justifies the suspicion that the need to monetise public debt is delaying the normalisation of the US monetary policy and brings about corresponding policies from the ECB and other Central Banks. In this respect, the impact on the exchange rate may have been incurred by the range of collateral effects from that of the main objectives of the monetary policy.
Is it possible that largely stable consumer prices in Europe, defined “deflation”, justify massive purchases of public and private securities by the ECB? The stabilising (or slight reduction) in consumer prices gives a breather to real wages, especially since it is partly caused by external factors such as the price of oil. In Frankfurt, are they really concerned by the price of courgettes and smartphones? Or, more realistically, are they setting themselves different, undeclared objectives, such as:
- an exchange rate with the dollar area allowing European exports to be competitive (in fact, from the current accounts being largely at even levels, the EU has achieved a surplus amounting to 4% of GDP)
- a rate of inflation to support less efficient businesses (including banks) by reducing the real value of their debt to the detriment of creditors and by trimming real wages (what guarantees that such a shot in the arm is used to increase investments and productivity?)
- having a reserve of “firepower” available to ward off other attacks (again coming from Wall Street) against the debt of the most fragile countries, against the banks shouldering such debt, against the Euro and against the Union.
This overload (even if only presumed) of objectives on the ECB justifies Draghi’s worries about not being able to fulfil all expectations (at the moment hidden behind the price of courgettes) and his repeated request for a federal budget policy to accompany the monetary policy to amplify its effectiveness.
The bouncing of the monetary ball from one side of the Atlantic to the other brings about fluctuations in the exchange rates that are particularly harmful to the economies of emerging and developing countries both for their commercial objectives and for the weight of foreign debt on subsistence economies that need investment to ensure lasting development. China has finally secured its participation in the SDR basket and a greater say in IMF decisions. Other countries are picking up the baton to continue the reform of the international monetary system. These include India which is acquiring a leading position: the governor of its Central Bank, Raghuram Rajan, who taught economics in American universities for many years, has recently taken charge of the reformist front with a series of articles criticising the global monetary non system[4] and demanding new rules for the monetary game[5] by means of an analysis very similar to that of Robert Triffin International[6].
I have the impression that we federalists will often find ourselves talking about Governor Rajan, as we did, ante-litteram, about Governor Zhou of the People’s Bank of China.
Translated by Roger Gibson
[1] Dani Rodrik, Has Globalization Gone Too Far?, Institute for International Economics, Washington, DC, 1997. Reviewed in this magazine No. 3/2000.
[2] Lucio Levi, Federalist Thinking, Lanham, MA, University Press of America, 2008, pp. 63-79.
[3] Mario Albertini (1919-1997) taught Contemporary History, Political Science, State Doctrine and Philosophy of Politics at Pavia University. He was a close associate, and then successor, to Altiero Spinelli. At the head of the European Federalist Movement of Italy (MFE) from 1966, he was President of the Union of European Federalists (UEF) from 1975 to 1984.
[4] www.project-syndicate.org, 2016-01
[5] www.project-syndicate.org, 2016-03
[6] Robert Triffin International, Using the Special Drawing Rights as a Lever to Reform the International Monetary System, 2014. The idea inspiring the report was of a second best solution: not yet a global reserve currency but a basket of currencies with the same function, not a Euro-like currency but an ECU-like basket i.e. the SDR basket which has the merit of already existing, even though it needs some reforms to be used for that purpose.
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