EURO-monetarism and the future of world capitalist currency reserves
by Arno Tausch, Associate Professor of Political Science, Innsbruck
University, Austria
All opinions, expressed in this discussion paper, are those of the author
and not of the Austrian Government
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Arno Tausch - Debating Euro-Monetarism
We start here from the assumption, that there would be a chance for a
socio-liberal transformation in Europe, that should not be missed. There is
the danger, that Euro-monetarism will accelerate the tendency of the world
system on its path towards financial speculation, narco-capitalism, and the
shifting of resources away from the Atlantic region towards the Pacific. On
the other hand, it is evident that Europe's long-term ascent from the Long
16th Century onwards from the state of a former periphery of the world
system to a center (Arrighi, 1995; Amin, 1975), which was based on agrarian
reform and mass demand, is now threatening to be reversed by the
application of monetary orthodoxy. The Maastricht debate is characterized
by the following basic fallacies: Fallacy number one: by high unemployment
you can control inflation. At the outset of this technical appendix, we
would thus like to state that unemployment, first of all, is an enormous
waste of economic resources. For 18 western democracies with complete UNDP
(or Federal Ministry of Labor of the Republic of Austria) data for 1995, we
have:
Graph 12.1: Unemployment is a waste of resources
Thus, only at very small and at very high levels of already existing
unemployment, a 'shock therapy' might work to flatten out budget deficits.
But else, there is an across the board negative correlation between
unemployment and budget surplus, i.e. increasing unemployment still
increases deficits. Savings has limits. And here, the sad story of
Euro-'monetarism' begins (the hyphens are to indicate, that the
relationship between real monetarist theory of the Milton Friedman type to
contemporary European applications is far from certain). And here, we
start:
'Jacques Rueff, fierce 1950s critic of American monetary hegemony, once
said: 'Europe will be built through a currency or it will not be built at
all'. What the ERM story shows is quite the opposite: trying to lock
countries like France and Germany together via their currencies does not
forge one nation; instead it turns domestic monetary questions into
international political conflicts' (Connolly, 1995: 1995)
It is time to stress the fundamental weaknesses of the EMU project from the
viewpoint of world system theory. Up to now, Europe does not form an
integrated economic region with truly European transnational corporations;
Europe forms only a preferential market (Amin, 1997). Secondly, Europe does
not have a continental societal project, that would integrate such areas as
research and development, public markets, and would have a joint commercial
and corporate law, and as yet does not integrate the vital sectors of film
and TV production. Trade union and other social law would have to be
integrated, and Europe does not have as yet a joint project of external
relations with the other regions of the world economy (Amin, 1997). The EMU
project should facilitate a truly common market, the free movement of
capital and stable external exchange rates. As the critics of the project
have shown all along, the project could only function if there is a
parallel economic and social policy in the member states of EMU; that means
harmonization of tax and expenditure systems, the integration at the level
of corporate policy, and the harmonization of trade union policy at the
European level. There would have to be a coordinated European policy not
only of the internal, but also of the external opening of markets -
especially regarding foreign investment and capital inflows from third
countries (Amin, 1997). I would even dare to say that neomarxists like
Samir Amin and neo-liberals like Vaclav Klaus agree on the 'constructivist'
approach of EMU - running counter to the world economic tendencies of
contemporary capitalism. We all know by today the Maastricht criteria
(Rothschild, 1997):
a) in the examination year an inflation rate no more than 1.5 percent
above the average of the three EU states with the lowest price rises
b) a long-term rate of interest within two percentage points of the
average of the three 'best' countries
c) a national budget deficit (covering national, federal and local
governments) less than 3 percent of GDP
d) a public debt ratio which does not exceed 60 percent of GDP
e) a currency for two years within the normal band of EMS
Fallacy number two now arises: that economic theory supports the EURO.
Academic economists found 24 main arguments against the EURO:
(i) external changes and shocks will not be answered anymore by changes in
the external exchange rate. Since the exchange rate is not anymore a factor
of economic policy regulation, either migration, wage flexibility, fiscal
policy or economic transfers from other countries will become the main
regulatory mechanisms in the new, monetarily united Union (Klaus, 1997;
Beirat 1996; Stephen Roach from Morgan Stanley Dean Witter, Neue Zuercher
Zeitung, Monday, 16th of June, 1997: 16). Fiscal policy under Maastricht is
also 'crowded' out, so practically only wage policy and or migration
remains as the economic adaptation mechanism of a country to react to
external shocks (Beirat, 1996)
(ii) but labor is not that flexible; so the result will be - in all
probability - economic transfers within the EMU countries. Economic
transfers are the inevitable result of monetary union (a contradiction,
perhaps spelt out most clearly by the neo-liberal acting Czech Premier and
economist Vaclav Klaus, 1997). This scenario will lead to the inevitable
result of a loss of autonomy of national fiscal policies (Klaus, 1997).
Such a scenario is all the more likely since there is no convergence in the
productivity of labor in the EMU countries themselves. Without a financial
transfer system from the rich to the poor regions, EMU will prove to be not
operational, anywhere up to $bn 1000 DM will have to be transferred
(Borchert, Sueddeutsche Zeitung, 1st March, 1997: 25), thus repeating the
experience of the integration of the New Laender into the Federal Republic
(iii) the problems of the classic 'euro-monetarist' Maastricht package are
compounded by the fact that not governments, but parliaments decide on
fiscal policy in European democracies - thus making the signatures of heads
of governments or foreign ministers under treaties of stability liable to
parliamentary control - or worse - Maastricht would have led to the gradual
erosion of the role of the national parliaments in favor of the executive
branch
(iv) according to the textbooks, the function of financial markets is the
transfer of savings into the financing of real economic investments
(Beirat, 1996). On a global scale, European and Atlantic region savings in
general will be transferred to real economic investments in Asia, the most
dynamic region of the capitalist world economy (Arrighi, 1995). Gross
domestic savings in the European Union are only 20%, and gross domestic
investment only 19% of GDP. In the US, savings (15%) and investments (16%)
are even lower. For the moment, the international system seems to work in a
very simple way: international debts finance the Asian/US economic
compound. On a global scale, East Asia achieves an investment boom (37%
investments per GDP), followed by South-East Asia and the Pacific region
(33%), while Eastern Europe and the CIS stand at 22% savings and
investments each (UNDP, 1996). Only Sub-Saharan Africa has a lower savings
and investments rate than the EU and the USA. At the heart of the
'euro-monetarist' Maastricht prescriptions against the European ills now
lies the assumption, that monetary policy will influence only prices, but
not output and employment. The EMU-optimists hope that the single currency
will be an ideal instrument for Europe to sustain in international economic
competition. But a 'hard' EURO will be of a negative influence on trade-,
and hence, on European current account balances with the rest of the world,
since European exports will become more expensive and European imports will
become cheaper. Until now, de-valuations were a proper economic policy
instrument of the weaker European economies to balance their negative
current accounts, as the example of Spain and Italy over the last years
amply demonstrates. This instrument would now be absent; only migration,
the wage rate and or unemployment would be the only options left for the
European mezzogiorno under EMU (Boyer, 1996). A sinister argument could
even be, that the motives for the EMU project could be rather
inner-European competition. A 'hard' EURO comprising the European
mezzogiorno, would ruin exporters in the South (that made important
headways against the dominance of German TNCs in Europe over recent years)
while cementing the position of German and a few other multinationals -
banks and companies - on an increasingly protected European home market.
Then, indeed, the European Union would become what Samir Amin has
contemptuously called 'The Fourth Reich' (Amin, 1997). Germany, far away
from being Europe's 'growth locomotive', is on its 'best' way to become an
economy, typically characterized by double deficits: total debts of the
public sector exploding since the 1970s (now reaching DEMbn 2133.3);
subventions now standing at DEMbn 116.2; the current account balance
deficit 0.6% of GDP, unemployment, for years cosmetically 'polished up' by
excluding the German East from the country's international statistics, now
at 11.2% and reaching the highest levels since the end of the Weimar
Republic
(v) on the other hand, the 'euro-monetarist' package against future
inflation under EMU, that solely relies on 5 monetary criteria, overlooks
the very plausible role of encompassing trade unions in combating
inflation - an argument, originally also conceded by neo-liberal economic
theory. Furthermore, the 'euro-monetarist' Maastricht strategy, as
envisaged by around 1995-1997, would have brought about a monetary union
between precisely those EU countries that already are in the upper 1/4 or
1/3 of stability on the European continent - with uncertain implications
for the unfortunate rest (Beirat, 1996). The election victory of the French
left on June 1st 1997 is inseparable from the strains that the original
'euro-monetarist' interpretation of the Maastricht project brought about.
The annual rate of inflation in EU-Europe is the minor problem: the real
problem is massive European unemployment
(vi) you cannot exclude an entire region from the project of European
Monetary Union. The Kohl/Waigel strategy would have relied on the European
North, and not on the South. The political backlash against
Euro-monetarism, Frankfurt (Franc fort?)-style, is only too well
understandable, considering the high social costs that French society in
particular would have had to bear. Dramatic words are being used by
European politicians nowadays: the EURO should guarantee peace on the
European continent et cetera. But the reality is different: it creates the
very conflicts between a 'hard' and a 'soft' European economic zone. But
'weak' Euro' would, most probably, also be no alternative: restructuring of
ailing European enterprises will be postponed; with capital markets most
probably reacting by pushing up interest rates (Neue Zuercher Zeitung, 16th
of June, 1997: 9), thus prolonging the vicious downward cycle of the
European political economy. The only real alternative would be to follow a
socio-liberal flexible growth path, Danish, Dutch, Irish or Asian style
(vii) export markets of the 'ins' are heavily dependent on precisely those
European nations, whose participation in the EMU project was long
considered to be doubtful. But currency de-valuations in the 'outs' would
be a high probability during the initial phases of the project, thus making
the employment situation in the 'ins' all the more difficult. Germany and
France lost important market shares in Italy during 1992 - 1994 (Beirat,
1996). The 10 countries which fulfilled two, three or four Maastricht
criteria by 1996 (Belgium, Germany, Finland, Netherlands, France, Austria,
Luxembourg, Denmark, Ireland, United Kingdom) would have had 55 votes on
the EU council, while the 'outs' (Sweden and the European 'mezzogiorno')
would have had enough votes (32) to block voting in the Council (Beirat,
1996; our own calculations from Weixner and Wimmer, 1997). This perspective
could have also blocked the project of extending Europe eastward
(viii) all this will lead to a 'deficit' of democracy in the Union; in
accordance with the liberal doctrine that the weakening of democracy is -
inter alia - the result of the geographical distance between the locality,
where decisions are taken, and the citizens, who are the subject of these
decisions (Klaus, 1997)
(ix) 1996, Portugal, Spain, Italy and Greece did not meet any of the first
four criteria; Sweden missed three criteria; Germany and Austria two; and
the rest of the Union at least one of the criteria (Weixner and Wimmer,
1997). Only Luxembourg meets all the five Maastricht criteria (Weixner and
Wimmer, 1997; Rothschild, 1997)
(x) international financial speculation will prove to be a formidable
factor in the line-up for the realization of the whole project. On 'Black
Friday', July 30th 1993, the Bundesbank had to buy foreign currencies to
the tune of $bn 30 DM under the old EMS (Weixner and Wimmer, 1997). Now,
the political conflict lines in Europe would suggest: either a 'weaker'
EURO against the Dollar and the Yen, which is good for the European export
industries and the European South on the world markets; an option, probably
supported by the new left wing governments around Europe; with the
inevitable flight into real estate and the Dollar by the accumulated wealth
in Germany (and, to a minor extent in the other countries) to the tune of
over DMbn 4000 to DMbn 5000 as the immediate consequence; or Maastricht is
realized at the cost of transforming the European East and South into a
mirror-picture of the process of the integration of the New Laender into
Germany after 1989. The vast size of accumulated savings in Germany,
together with the savings of the European shadow economy, are an immense
pool of potential speculative money, should the EURO project get into real
trouble. Anything can happen: transfers into US $, real estate, Yen, Swiss
Francs, Swedish Crones. Remember in this context, that - compared to these
huge amounts of accumulated legal and illegal wealth - the German currency
reserves are 'only' $bn 80.2: a sustained speculation against the
Deutschmark on the international financial markets could trigger-off a
panic reaction on the part of German wealth-holders, which could mean the
end of the EMU project. Hardly observed is the fact, that German currency
reserves amounted $bn 85.3 in 1996 and melted down to 80.2 in March 1997
(see also, Chapter 8 and Chapter 12). International currency reserves could
melt under such circumstances like an atomic reactor during a greatest
possible accident. Seen in such a way, the political class that rules
Germany knew well enough, why it insisted all along on a 'hard EURO' - to
the detriment of European export industries. But you cannot expect banking
capital to rule against banking capital. In a real battle over
international finances, the European strategic currency reserves are small
compared to the rising Asian reserves, brought about by the enormous
accumulated current account balances over the years. In 1997, Taiwan alone
had currency reserves to the tune of $bn 88.0; Japan 218.2; China 114.0;
Hong Kong 69.6, Singapore 77.3; while Switzerland had 35.3; and the USA
only 56.2, with the big European economies like France, Spain, the
Netherlands and Italy holding reserves to the tune of around 25 to 60
billion $ each (see also, Chapter 12). Well-established German financial
institutes already more and more propagate Dollar savings accounts - a
clear sign how real the transfer of German savings into US $ already has
become. It is significant, that the European mezzogiorno states Spain
(60.6) and Italy (45.4) have increased their foreign currency reserves by
about $bn 30 last year, and together already have larger reserves than the
Federal Republic of Germany
(xi) public opinion in the richer countries of the Union is mostly against
the whole project, with rejection rates in 1996 already ranging from 46% in
Austria to 64% in Denmark (Weixner and Wimmer, 1997)
(xii) the erosion of the EMU-project finds it's counterpart in the erosion
of the state of public finances in the Federal Republic of Germany. The
economic consequences of Mr. Theo Waigel are very clear to judge: he
presided over the doubling of Germany's public sector debt to $bn 1259
during his record tenure as Germany's longest-serving finance minister. Hid
'defiant alchemism' in his bitter dispute with the Bundesbank over German
gold reserves is but the last straw in a long chain of events (Financial
Times, Weekend, May 31st, June 1st, 1997)
(xiii) the shadow economy will partially have to come out from the
darkness, most probably increasing the already existing capital flight into
the Dollar, the Yen, and into real estate. Indeed, considering the volatile
character of international finances, a real avalanche could ensue, making
the EMU-project impossible
(xiv) the Maastricht criteria will prove to be an instrument of
anti-Keynesian global governance (Raffer, 1997). But the reception of
neo-liberal economics by the EU-Commission and the Maastricht heads of
governments was highly selective: while they seem to imply the importance
of 5 monetary criteria, the Union overlooks day by day other neo-liberal
prescriptions in important policy areas - from human capital policy over
trade policy to agriculture
(xv) if General Motors, AT & T, and individual households had been
required to balance their budgets in the manner applied to the Federal
Government (which in the US is under similar pressures as the governments
in Europe), there would be no corporate bonds, no bank loans, and many
fewer automobiles, telephones and houses (Vickrey, 1996). The Maastricht
criteria are part and parcel of the 15 fatal fallacies of financial
fundamentalism
(xvi) a more useful arrangement than Maastricht would have been to achieve
first a certain degree of political cohesion in order to arrive at a more
consensual democratic and better enforceable economic framework
(Rothschild, 1997; Amin, 1997)
(xvii) there are fundamental differences between the 'freedoms' for
capital and labor - the first can be moved without having to learn a
language and without leaving behind friends and a familiar environment -
labor even when organized in a union cannot threaten to transfer as body to
another firm or country. The freedom of labor does not present a
countervailing power to the bargaining power obtained by business through
the complete liberalization of capital movements; on the contrary; that
bargaining power is strengthened by the uninhibited possibility of
attracting workers from low-wage EU countries (Rothschild, 1997). The basic
policy approach of Maastricht and the Commission overlooks this important
fact
(xviii) real outcomes in economic life, such as growth, employment,
productivity, development, income distribution, do not figure at all in the
so-called convergence criteria (Rothschild, 1997)
(xix) full employment is a good precondition against inflation
(xx) the harmonization of social conditions in the Union by the Social
Charta remains one of the most important tasks for an effective, real
monetary union, because this would lay down the conditions for a
convergence in the real welfare conditions of the countries concerned
(Rothschild, 1997)
(xxi) with the Maastricht criteria, Kalecki's prediction, dated 1943,
about a political business cycle with the entrepreneurs losing any real
interest in full employment would come true (Rothschild, 1997; Raffer,
1997)
(xxii) the institutionalized acceptance of neo-classical economics,
inherent in the Maastricht criteria, is only one-sided. The Free Market
optimism which had been developed on the assumptions of atomistic
competition between powerless firms is transferred to a world of
oligolopolies and mammoth corporations (Rothschild, 1997).
(xxiii) the negative attitude to special protective treatment for the
poorer regions and their development is the more astonishing in view of the
fact that the Union is not opening it's own economic frontiers world-wide
(Rothschild, 1997)
(xxiv) the conflict between the 'ins' and the 'outs' would increase
instead of decrease under a scenario of a strict implementation of the
Maastricht criteria. Eastward extension of the Union would be more
important than monetary union (Amin, 1997). Maastricht-style monetary union
would, especially for the new members of the Union in the East, mean a
two-class type of European integration
Fallacy number three now consists in the assumption, that you can exclude
the shadow economy and their accumulated savings from the EURO debate. A
new currency will mean for the gangsters: open the money suitcases and try
to exchange or place any bill that is not yet placed. But for many members
of the huge and growing criminal underworld (there were 87 prisoners per
100000 population in the EU alone in 1993; i.e. a rise against the 77 per
100000 in 1987) the question of EMU is also a fundamental one: emerge with
the cash? Place it somewhere? Exchange it for $ bills? To give an
impression of the size of the criminal underworld, it might suffice here to
state that in EU countries alone, there is a prison population of about
320000 people. Extending the Union eastwards and including the Czech
Republic, the Slovak Republic, Hungary, Romania, Bulgaria and Poland, would
mean adding another 153000 people to this entire army. Just to give an
imagination about the size of the problem, it might suffice here to state
that by comparison, the entire armed forces of the European Union are only
2068000 people (all data calculated from UNDP, 1997). Recently, the
international press has put the existing dangers in such terms:
Rising Wave of Mafia-Style Violence Terrorizes Eastern European Nations
Crime: Police seem helpless to deal with killings and bombings. Transition
from communism to market economy helped create opportunities for gangs.
Los Angeles Times
SUNDAY January 19, 1997
JUDITH INGRAM; ASSOCIATED PRESS
The businessman walked the few steps from home to his Jeep Cherokee before
he was cut down by a bullet through the temple, fired from a
silencer-equipped, large-caliber pistol about three yards away. No one saw
the murder of Jozsef Prisztas, who was allegedly linked to gangsters, on a
residential Budapest street shortly before noon on Nov. 1. At least, no one
was talking.
The slaying was emblematic of the Mafia-style crime wave that has taken
hold across much of post-Communist Eastern Europe--where citizens were
ready for just about everything democracy could bring except the terror of
organized crime. No week goes by without a message from the underworld: a
bus or car bomb here, a grenade there. Robbery, murder, the smuggling of
drugs, arms and people, and money laundering are on the rise. Huge caches
of smuggled weapons have shown up in Slovenia, the former Yugoslav republic
between the Alps and the Adriatic Sea. Bombs have ripped through
currency-exchange booths in Prague, capital of the Czech Republic. A former
Bulgarian premier, Andrei Lukanov, was gunned down in a Sofia street in
broad daylight and the country's underworld was blamed. Across half a
continent, gangland violence has spread fear--and left courts, police and
politicians flailing. "We say that Europe has to unite," said France Bucar,
a veteran anti-Communist dissident who recently stepped down as head of
Slovenia's parliamentary security commission. "But organized crime
discovered this already before. And the victim of all this is the security
of our society. "Eastern Europe's gangs have grown rich on the divide
between their countries and the West, supplying what legitimate businessmen
couldn't: first pantyhose and jeans, then computer parts and drugs, finally
"protection" for money, property and lives. The current gangland wars among
Eastern Europe's underworld princes reflect just how big the stakes have
grown. In Hungary, bomb explosions, hand-grenade attacks and shootings
killed three men and seriously wounded three in November and December. The
toll is not out of line with many Western nations--Budapest reported 60
murders among its 2 million residents in 1995, which compares with 72 in
Berlin with nearly twice the population but 131 in Cleveland with
one-fourth the people. But the bloodshed shocked this normally placid
society because the police seem helpless. "Maybe it's a conflict of
interest or a turf dispute, but we also think that someone made off with
billions of forints, and that there's real estate speculation involved,"
said Laszlo Garamvoelgyi, spokesman for Hungary's national police.
Organized crime spread rapidly in the legal limbo that accompanied Eastern
Europe's transition from communism to a market economy. From restaurants
and entertainment spots, gangs moved into protection rackets, loan-sharking
and the drug trade--especially after the wars in former Yugoslavia shut
down a key east-west narcotics route. In Hungary, illegal oil-importing
schemes have reportedly netted huge amounts of money for the underworld.
Prisztas' killing marked a new, deadly turn in Budapest's gangland war.
Within three weeks, two of his associates were seriously wounded--jockey
Csaba Lakatos, shot near the stables at Budapest's racetrack, and Pal
Totka, a fish wholesaler and former boxer shot in the courtyard of his
apartment building. As organized crime has flourished, officialdom has all
but admitted defeat. In Maribor, a bucolic Slovenian town at the foot of
the Alps, the mayor, Alojz Krizman, says the "mafia" rules in his nation.
Take local anti-hero Maksmilijan Vollmajer. Before his death in a car crash
this autumn, Vollmajer was as well known across the cozy Alpine country of
just under 2 million people as its president or premier. "His name had
become a symbol for the nonfunctioning of the rule of law," said Otmar
Klepsteter, a Slovenian journalist. Vollmajer spent time in prison in
neighboring Austria before rising to notoriety in the post-Communist chaos
of Yugoslavia's breakup. Police and locals say he built a profitable line
in illegal drugs, insurance scams and violent retribution on any foe. In
1994, he was even convicted for some of the 65 crimes police charged him
with. But a liberal justice system--devised by those who wanted to break
the heavy hand wielded by the police under communism--led an appeals court
to overturn the sentence. Police allege Vollmajer took revenge by planting
a bomb that missed the judge who had dared sentence him, but did maim the
judge's wife. That was just one of 12 explosions that "poured fuel on the
fire" in Maribor this past year, local police chief Milan Kus said. No one
was killed. "The aim of these explosions is not an attack on bodies or
life, but to spread fear," Kus said.
Copyright © 1997, Times Mirror Company
Los Angeles Times© 1997 Los Angeles Times. All rights reserved.
DIALOG® File Number 630 Accession Number 2540137
Organized Crime Goes Global While the U. S. Stays Home
The Washington Post
May 11, 1997
Edition: FINAL
By: John F. Kerry
Most Americans still refuse to believe just how well-organized global crime
has become. Such groups as the Russian mafia and the Chinese triads exist
only in the slick fantasy world of television, movies and thriller novels.
Like the dark and powerful men of the "Godfather" trilogy, they may thrill
us or chill us, but we don't recognize them as a serious, unprecedented
threat.Bu t a new criminal order is being born, more interconnected,
violent and powerful than the world has ever seen. To fight it, we have to
make fundamental changes in our legal and law enforcement structure, and
encourage other nations to do the same.
In strategy, sophistication and reach, the criminal organizations of the
late 20th century function like transnational corporations and make the
gangs of the past look like mom-and-pop operations. Today's criminal
cartels use high-speed modems and encrypted faxes; they buy jet airplanes
three or four at a time and even have stealth-like submersibles in their
armadas. They hire the finest minds to provide the kind of complex
accounting procedures any multi-billion-dollar empire requires.
In one sense, this phenomenon can best be understood as part of the same
great process of change that is transforming nearly all aspects of modern
life. As Harvard's Rosabeth Moss Kanter has said, "The world century is
beginning. " And, I would add, the century of world crime. Crime has been
globalized along with everything else -- except our response to it.
America is the great prize for criminals, the prime market for imported
narcotics, weapons and vice. For that, Americans are, in part, responsible:
We create the demand for these products. Individuals must be held
accountable when they buy cocaine, guns and the services of prostitutes.
But we must also recognize that the temptation to purchase is now enhanced
by sophisticated organizations totally focused on the global marketing of
vicious products and violent services, and capable of the wholesale
corruption of governments and societies to protect these enterprises.
As the former director of the CIA, James Woolsey, testified before my
committee: "When international organized crime can threaten the stability
of regions and the very viability of nations, the issues are far from being
exclusively in the realm of law enforcement; they also become a matter of
national security." A decade ago, my committee investigators and I began to
uncover portions of a common international infrastructure for crime. We
interviewed criminals inside various U. S. prisons and found that they had
remarkable access to political figures in countries all over the world.
This work led me to the drug network of Manuel Noriega and eventually to
the place he laundered his money, the Bank of Credit and Commerce
International (BCCI). During the dozens of hearings I held, I was able to
expose a lot about this hidden world. But I felt that in the day-to-day
headlines, some of the scope of what I was seeing had yet to be adequately
described.
The new global criminal axis is composed of five principal powers in league
with a host of lesser ones. The Big Five are the Italian Mafia, the Russian
mobs, the Japanese yakuza, the Chinese triads and the Colombian cartels.
They coordinate with smaller but highly organized gangs with distinct
specialties in such countries as Nigeria, Poland, Jamaica and Panama, which
remains a significant transshipment and money-laundering point even after
the arrest of General Noriega. Various alliances among these groups are
still in the formative stage, but all indications are that those relations
are rapidly becoming more complex and coordinated.
For instance, in the summer of 1992 the leaders of the Russian and Italian
mobs held a series of secret summits in Prague, Warsaw and Zurich. Our
intelligence on these kinds of gatherings is woefully inadequate, but we
can tell much from the results. They decided that rather than compete in
the drug trade, they would form a strategic alliance: The Sicilians now
provide the know-how to acquire and market the drugs, and the Russians
provide security for transit routes and distribution networks throughout
the former Soviet empire.
To see where these interconnections can lead, consider such cases as the
contract hit man who flew in from Moscow to kill an uncooperative store
owner in New York, on behalf of the Organizatsiya. He got his fake papers
by supplying the Sicilian Mafia with Soviet Army surplus ground-to-air
missiles to smuggle into the Balkans to supply the Bosnian Serbs with the
firepower to take on U. N. security forces.
As French journalist Roger Faligot documented in his recent book on Chinese
crime, "The Invisible Empire," Chinese, Japanese and Colombian criminals
are working together in the drug trade: "The Colombian cartels produce the
cocaine, the Chinese take it in exchange for heroin that can then be
smuggled into the U. S. The triads bring cocaine to Japan and distribute it
with the help of the yakuzas. Then the Asian mafiosi launder their drug
money in Europe. " The triads also have spun out extortion and
loan-sharking operations to major British cities such as London, Manchester
and Glasgow; heroin trafficking to Rotterdam; prostitution, gambling,
robbery and contract murder to Germany; money laundering to Prague; weapons
trafficking to Romania, and alien smuggling to Moscow.
In 1995, Italian officials uncovered a sophisticated joint venture between
the Camorra crime group and the Russian mafia. The Russians received
counterfeit $100 bills in exchange for giving the Italians property,
possibly including a large bank, and significant arms shipments. The
Italians also buy large quantities of the synthetic narcotics that are
becoming a major industry in Russia.
There is evidence that the American mafia, perhaps in an effort to
modernize and rejuvenate, is striking similar alliances. Anthony "Gaspipe"
Casso, the former acting boss of the Lucchese crime family in New York, has
told investigators about New York mobsters taking part in scams developed
by the Russians, especially gasoline tax frauds and gasoline bootlegging.
"The Russians supplied the brains and the Mafia supplied the hit men," one
investigator said.
America must lead the world in the fight against these private criminal
enterprises just as we led the world in the fight against public criminal
governments. But we cannot fight alone; we need to create a new
international alliance to meet the threats, like the alliances that
defeated fascism, communism and Saddam Hussein. We need a revolution in the
way we conceive of every aspect of the law, from jurisdiction to
punishment. We need to move beyond traditional notions of national
sovereignty when those notions benefit only the bad guys.
When a Dominican hit man comes to the United States and engages in a
contract killing that winds up also taking the lives of innocent
bystanders, he knows he's scot-free if he can reach Dominican soil before
the United States grabs him. The same is true if he is Panamanian, Costa
Rican, Russian or, for all practical purposes, French. When a Colombian
drug trafficker in a Honduran-flagged boat enters French or Dutch waters
off the Caribbean island of St. Martin, he knows the pursuing U. S. Coast
Guard vessel will have to stop at the three-mile limit.
We have to recognize that the world's patchwork quilt of legal systems is
as much an anachronism as carbon paper. A working system of laws to combat
transnational crime must be hammered out among nations of good will. These
would include:
* Minimum standards of international law. Nations must agree both on a
consistent system of laws and a consistent system of punishment. As matters
now stand, money laundering is not a crime in Turkey or Russia; extradition
is constitutionally banned in Colombia; and illicit financial dealings
still account for too much of the business of banking systems in countries
like Switzerland and Austria.
* Crackdown on money laundering. The dozen or so countries, such as the
Cayman Islands, Cyprus and Vanuatu, that have become centers for laundering
and sheltering money must be made to desist. The United States has the
power: We could refuse to allow pirate financiers to move currency through
the U. S. , or impose customs limitations on their trade and search all
their cargoes, or forbid Americans to do business there.
* Controls on electronic money. We must insist that the electronic movement
of capital be regulated far more strictly. The technology is available to
monitor all electronic money transfers. But bankers, although they pretend
otherwise, aren't doing all they can to identify the sources of money
crossing their threshold. We need to make sure they understand their
obligations as key players in enforcement efforts.
* Global asset forfeiture laws. The personal holdings of criminals are
often located in any number of foreign lands -- yachts in the Caribbean,
homes in the south of France. Each country should have laws allowing
domestic and foreign law enforcement to seize and share the property of
convicted criminals.
* Transnational courts. In partnership with friendly nations, we need to
experiment with a system of special courts to try at home cases involving
victims abroad. In such cases, which would be accepted only by agreement
between both nations, trials could take place wherever the evidence and
witnesses were located, applying the laws of the country where the crime
took place.
* More U. S. law enforcement officers abroad. As FBI director Louis J.
Freeh wrote recently, "If the FBI operates only in the United States, there
is no way we can cope with crime threats of foreign origin that suddenly
arrive full-blown in the United States. " We should add 1,000 officers to
the 2,000 already stationed abroad. Every U. S. embassy should have a law
enforcement team.
The damage done by international crime is rarely as specific and dramatic
as that of a terrorist attack, but in fact it is greater. We cannot see the
billions of dollars hemorrhaging out of our economy. We cannot directly
feel the violation of our sovereignty and territorial integrity by the
smugglers of narcotics and human beings. We cannot easily envision the harm
to our national security through the failure of countries that once bravely
struggled for the dignity of freedom.
If, however, we prove unable to connect the drive-by shooting with the
jungle laboratory and the numbered account, we will fail to understand the
world we live in. Worse, we will fail to meet our challenge at a critical
junction in human history.
Sen. John Kerry (D-Mass. ) chaired the Senate Subcommittee on Terrorism,
Narcotics and International Operations. This article is adapted from his
book, "The New War," to be published next month by Simon & Schuster.
Washington Post Online (c) 1997 Washington Post. All rights reserved.
DIALOG(r) File Number 146 Accession Number 4124940
The battle over the EMU-project now unfolds on the international financial
markets. Our prediction for Germany in this context is very dire. Germany's
curency reserves and current account balances are pointing in downward
directions. This process is also inexorably linked to the phenomenon of the
transfer by the elites in Germany into foreign currency holdings. On
paper, the USA face the same current account balance trends - to be
compared at any rate by the role of the $ in international transactions,
but 'their' American-Asian-Pacific economic space attracts - mainly via the
Japanese bank - a large percentage of the surplus capital of the world,
partly also, because both legal and illegal funds, in anticipation of the
EURO, flow to that region. Japan's official current account balance also
points in a downward direction, but currency reserves go up - a clear
indicator for the hypothesis, that both legal and illegal world surplus
capital now flows to Japan. On a world level, it is absolutely unrealistic
to overlook the power of international drug cartels and other criminal
groups. 20 'narco states' (soft on drugs, according to the US State
Department terminology, US State Department, 1996) even on international
reserves. The leading 'drug countries' with comparable data (see list at
the end of the graph) control already $bn 324.137 currency reserves, while
the 10 leading western industrial democracies and financial places (Japan,
USA, Germany, France, United Kingdom, Italy, Spain, Austria, Switzerland,
Sweden) still control $bn 739.707. But an alarming of their own currency
reserves again stem already from the proceeds of money laundering, as the
comparison between current account balances and international reserves
suggests:
Graph 12.1a: International reserves of 20 narco states and 10 leading
western democracies
Definition: A narco state is understood here as a country, figuring on the
list of statements of explanation by the US Department of State
International Narcotics Control Strategy Report, 1996 (unclassified,
available via international booktrade)
Even the most powerful capitalist nations are - due to the mechanisms of
international financial markets, practically at the mercy of the currency
reserves accumulated in the 20 leading narco states of the South
(international reserves):
Graph 12.1b: The share of narco states in international reserves of the
main world financial centers
In the direct comparison between Japan, the US and Germany, we also see the
basic weakness of the Deutschmark against the main contenders:
Graph 12.1c: currency reserves and current account balances since 1990 in
the world system - Germany, Japan and the USA compared
Maastricht tries to achieve a stability that it can never achieve. The real
reasons of financial instability on a global scale are to be found in the
ever-larger share of drug money in international reserves and savings. $85
billion in drug profits are laundered through the financial markets each
year, with an upward tendency. With total world savings at 22% of world GNP
(25385 US$ billions), these profits are 1.5% of world savings. The volume
of the drugs trade - at least $bn 500 - is 9% of world savings and
approximately double the size of the largest single currency holdings of
any country in the world system, Japan. The drug lords could ruin the
international financial system. Maastricht walks another path - that of
financial austerity, to bring about financial stability.
Another fallacy, fallacy four, of the Maastricht process is that it
excludes the option of full employment. UNDP-data 1996 show that labor
force participation rates and inflation rates in the highly developed
countries had quite a negative correlation with each other which flattens
off only at very high levels of employment, thus indicating certain limits
of the 'NAIRU' debate ('non-accelerating inflation rate of
unemployment')(Beirat, 1996). Maastricht policy brings about not only
short-term, but also middle range and long-term unemployment; which - in
the long run - is a very costly strategy, even increasing the very
inflation process:
Graph 12.2: unemployment, labor force participation rate and inflation in
developed capitalism
Since official unemployment statistics tell us only half the story, the
negative influence of labor force participation rates on inflation are
telling indeed:
Fallacy five consists in overlooking what a 'hard' EURO will mean for the
European exporter. Like in the former GDR, it will mean an enormous upward
push in the price of European export goods on world markets. This analysis
maintains all along, that factors, like the position in the world economy,
are far more important variables than mere monetary aggregates. So why
should Germany push so hard for a 'hard EURO'? The hypothesis, that German
corporations and banks, by a policy of a hard EURO, rather tend towards
eliminating present and future unwelcome competitors from the closed
European home market, instead of providing the European backbone in the
trilateral competition between Asia, America, and Europe, finds further
support by a look at the current account balances of the world's leading
industrial nations, in comparison with the EU, by around end 1996:
Graph 12.3: European current account balances by international comparison
Proponents of EMU maintain, especially in Germany, that, if the project
should not be realized, an immediate upward re-valuation pressure would
develop against the Deutschmark. We think however, that this hypothesis
rather belongs to the reign of fantasy; rather, down-ward corrections of
the exchange rates of the Lira, the Peseta and the Franc over the last
decade are to 'blame', that today, France, Spain and Italy have very high
current account surpluses and comparably large foreign currency holdings at
their central banks. Faced with an ever stiffer competitive pressure from
the world markets, Germany indeed seems to be inclined (revert?) to a
policy of monetarily regulating, if not dominating, the chances for export
of the European continent. Only a 'hard' EURO would ruin profoundly enough
the unwelcome competition from the European mezzogiorno countries, a
competition, which is, nota bene, partly the result of the run-away of
German productive capital abroad under present-day European Union
regulations. A closer look at the trade-weighted exchange rates of major
European and world currencies also shows us, that the myth of an upward
pressure on the Deutschmark, should the EMU project fail, will not be
maintainable in the long-run, a short and desperate attempt to create a
mini-EMU after a possible failure of the large EMU project notwithstanding.
A third, theoretically possible path, to combine a hard EURO with an
attempt to 'recycle' German savings into real transfers towards the
Mediterranean EU countries, and later, the East, could be attempted at
Amsterdam as a last attempt by Chancellor Kohl to save the project, but it
would be politically unthinkable in the long run and would create enormous
pressures on the labor markets and for exporting industries. The story of
exchange rates over 1996/97 is quite different from what politicians
sometimes pretend. The strength of the Deutschmark is a myth:
Graph 12.4: trade-weighted exchange rates since 1990
Fallacy six consists in overlooking the real weakness of the D-Mark over
recent months, and it also consists in overlooking that this trend will
continue. What now follows, is something for a Mr. George Soros, and not so
much for the professional economist, let alone the Bundesbank in Frankfurt.
You can safely borrow in the bank DM m 10; and change it into $. The
rewards will be great. The casino-like economic times, that we live in,
demand from social sciences casino-type models that live up to these
necessities. Short of direct speculation, the following swings could be
tentatively interpreted, without maintaining any rigor from that first
inspection of the empirical data:
Graph 12.5: The projected rise of the $ and the fall of major currencies
Already, in more analytical terms, the following cross-national analyses
from the ups and downs of the exchange rates are possible, using the data
base of the 'Economist' newsmagazine (Economic Indicators, comprising GDP
growth, unemployment, inflation, current account balance per GDP, growth
rate of broad money supply (M2), interest rates (banks prime rate), foreign
reserves) for 12 leading economies in the world over 1996/97. Available
data series also show, that the obsession with inflation should give way to
an obsession with economic growth. The ups and downs of the exchange rate
are determined primarily by economic growth, and not by monetary
aggregates. Thus, we expect an underlying, basic strength of the US $ for
1997 and 1998, since America will have a stronger growth than Europe:
Table 12.1: the determinants of the 1996/97 exchange rate rise or fall
The case for reflating Europe's economies can even be stated in a
provocative fashion:
Graph 12.6: growth, consumer price rises (1997 in %) and changes in the
trade-weighted exchange rate, 1996/97
Legend: inflation and exchange rate dynamism
One consequence of this relationship between inflation and upward movements
in the trade-weighted exchange rates is a prediction of the behavior of the
major currencies on the world markets in 1998. The prediction is based on
the Economist's prediction of inflation in Europe and in the major other
economies of the world in 1998
If you want to invest your money in Sterlings or US $, do it. Do not go for
Swiss Franks, Deutschmarks, Swedish crowns, or French Francs.
Graph 12.7: $ and Sterling - superstars 1998. Predicted exchange rate
dynamics, 1998 in %
Fallacy seven is equally important as the six previous ones. It consists in
overlooking the effects of illegal money on Europe's poorer East. A hard
EURO would attract an enormous amount of illegal Eastern capital to Western
Europe, while the crooks will not hesitate to change their partially
existing D-Mark wealth into $ or other non-EURO currencies, should the need
arise. Market imperfections and the peripheral position of Eastern Europe
in the world economy cause a tendency towards a secular current account
balance deficit in most of the new democracies (at least those with
historical records of big landholding and a weak national state), that can
practically only be closed by the shadow economy, including illegal
migration and money laundering:
Table 12. 2a: economic performance in Central and Eastern Europe, 1997:
Strict financial discipline indeed brings about less unemployment and not
more, by international cross-national comparison. But rising unemployment
pushes inflation up, and not down.
Thirdly, current account balances determine only to a certain extent
international reserves, and indeed, excess reserves are a good signal for
money-laundering processes taking place in the economy, but such excess
reserves dampen inlation. The transformation economy, successor to
peripheral socialism 1945 - 1989, Nazi occupation 1938/39 - 1945 and
peripheral capitalism 1450 - 1939, is characterized, as Amin teaches us, by
a secular current account balance deficit, that has to be closed by almost
any means - including imports of 'illegal savings'. Like all wealth-owning
capitalist classes, the crooks of Eastern Europe become very interested in
financial stability and the canon of 'property rights', once their illegal
money is parked. The right-hand upper outlayers in our following graph -
the Czech Republic, Hungary, Poland, Slovakia, all have nowadays a much
higher proportion of foreign currency reserves to their GDP as one might
expect from the current account balance (see, by contrast, older data for
around 1994 in Chapter 6). Only the first, rising parts of our curves - or
the straight fitting line - correspond to economic wisdom, while much of
the rest is due to the global casino of money laundering and capital
flight.
Eastern European inflation, to a great part, is also linked to the problem
of illegal capital inflows that boost reserves in excess of the available
current account balance data, contributing to a dampening of the inflation
process in the semi-periphery. Thus, one might say, that the stability of
the East European exchange rates depends on these very same huge semi-legal
and illegal reserves, that were accumulated by the opening of the twin
Pandora's boxes of open borders and liberalized world financial markets.
But dependency becomes decisive, when long-term growth perspectives of East
and Central European economies are being determined. There is indeed 'the
balance of payments constraints' on economic growth.
Not only the stability of the Eastern currency, but also Eastern economic
growth becomes largely dependent on the import of 'narco' and other
laundered money, that neatly shows up in the international reserves
statistic.
Fallacy eight is to overlook that in the long run, the stability of the
capitalist system needs labor as an organized, countervailing power, that
the very EURO process is about to crush. In the developed capitalist
countries, the following relationships suggest a new, labor-oriented
approach to stabilization policy. Our Aristotelean message of a middle
course thus is: at least a medium-level unionization rate and earnings
growth rate will be necessary to stabilize capitalism, while at the same
time the empirical support for a shortening of the weekly working hours as
a way out of the crisis is rather weak.