The Euro and the world economy, Issue 35

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The Euro and the world economy

The euro was launched, as planned, on 1 January. Among other things, the launch produced a new pun: euro-phoria. Politicians, big business leaders and headline writers hailed a new page of history - "impossible to turn back", as Portugal's finance minister proclaimed.

But 'euphoria' is defined by one dictionary as "a feeling of great elation, especially when exaggerated". And claims that the EMU is something approaching utopia for the eleven participants is certainly greatly exaggerated.

On 13 January Brazil's currency, the real, was devalued - opening yet another phase in the inexorable spread of economic crisis. When it hits the US and Europe with full force, the approaching economic downturn will shatter the euro-triumphalism of recent weeks.

It is only the fact that the approaching world downturn has not yet made its full impact on Europe and the US that has allowed the euro to go ahead on schedule. For some time, we were predicting that, on the balance of probabilities, it was unlikely that the euro would be launched as planned. Events have proved this wrong. But this is essentially a matter of timing, not substance. The euro project was able to proceed because of a relatively favourable conjuncture. The 1990s boom, together with a strong US dollar (which brought stability to world currency markets), enabled the EMU participants to achieve quite a high level of convergence (with the help of some fiddling of the national accounts). At the same time, the ideological counter-revolution which followed the collapse of the Stalinist states helped them to ride out the opposition to Maastricht-inspired cuts.

Nevertheless, Europe's chronic economic sclerosis has been severely aggravated already by the measures taken to comply with the Maastricht criteria, especially the savage spending cuts, which have resulted in slow growth and high unemployment even during the recent growth phase of the business cycle.

Now there are clear signs that recession is beginning to hit the major European economies. "Two weeks after eleven countries successfully launced the euro as Europe's new single currency," commented the International Herald Tribune (15 January), "a raft of fresh evidence indicates that the economies are stalling more abruptly than specialists had expected just a few months ago." The growth of the German economy peaked at 2.8% in 1998, but is projected to be well under 2% this year. Unemployment, already well over four million, is beginning to rise rapidly. The French and Italian economies are also slowing down.

The European recession will inevitably provoke a crisis for the euro. The straitjacket of 3% or lower budget deficits and the closing-off of the escape valve of devaluing national currencies will mean - under the EMU regime - even more savage spending cuts, lower wages and higher unemployment. In other words, the euro will impose a savagely deflationary policy on the EMU region even during a recession. The social and political effects will provoke mass anger, which will be focused against the euro regime.

Even now, many strategists of finance capital privately admit that, in the event of 'economic shocks', there is a serious risk of secession from the EMU/euro by a number of the weaker economies. Secession of one or two countries does not mean that the EMU will immediately collapse. A 'lesser EMU', based on the former deutschmark-zone countries (Germany, Netherlands, Benelux) could survive a few defections, though the international role of the euro as a stabilising currency would be undermined. The defection of one or two of the major economies, however, especially France, would wreck the euro.

France has paid a heavy price for maintaining a strong franc and complying with the Masstricht criteria.
Steps by right-wing governments under president Chirac, continued by the 'socialist' Jospin, to comply with the Maastricht criteria have provoked a series of mass movements since 1994-95. The depressionary effects of the euro in the next period will provoke even bigger movements, which will put enormous pressure on the French bourgeoisie to break out of the euro straitjacket.

Undoubtedly, EMU has set up an economic, financial and political framework which will make it difficult for participating states to break out without delivering a severe jolt to Europe as a whole. This factor will further aggravate the crisis. But the contradictions of EMU make it almost certain that the euro will break down before completion of the final stage: the replacement of domestic currencies by euro notes and coins planned by 2002.

The crisis in Brazil has already punctured the renewed optimism which accompanied the year end rallies on Wall Street and other world bourses. The US policy of building a 'fire wall' around Brazil, with an aid package of $41.5 billion, has clearly failed. The debt default of Brazil's third largest state, Minas Gerais, provoked a further flight of capital from the country and forced Cardoso's government to accept a devaluation of the real. At the same time, the austerity package which Cardoso began to implement immediately after his re-election has already pushed Brazil into a recession - which now threatens to spill over to Argentina and the rest of Latin America.

A downturn in Latin America will especially hit US capitalism. The loss of exports for US corporations, and especially the undermining of their profits from the super-exploitation of South America, will contribute to a bursting of the speculative bubble on US financial markets which has prolonged the upswing in the US. The approaching downturn in the US will plunge the whole world into a new and more serious phase of economic crisis.