>From my recent analysis: Globalization and European Integration
For a quick fix, I did no bother about the colorful EXCEL graphs in the
original manuscript
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 9.13: 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. Saving 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; see also Friedman's
excellent essay on the EURO, 1997). 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;
Friedman, 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 (Friedman, 1997;
see also Klaus, 1997; Beirat 1996; Stephen Roach from Morgan Stanley Dean
Witter, Neue Zuercher Zeitung, Monday, 16th of June, 1997: 16)
(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 former acting Czech
Premier and neo-liberal 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; Watzal, 1997), 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 East Asia,
formerly the most dynamic region of the capitalist world economy (Arrighi,
1995), to be succeeded today possibly by China, and or India. 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 achieved 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 internationally. 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, transfers and or unemployment would be the only
options left for the European mezzogiorno under EMU (see above, and Boyer,
1996, Friedman, 1997). 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 and the massive social
disintegration of the European cities. Don't be surprised if there are
severe riots in countries like France over the next years
(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 a
'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
(vii) currency speculations against the Italian Lira as the weakest part
in the European currency chain are very likely in spring, summer and fall
1998 (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, so it was decided to take on board the 'weaklings' except Greece
(Beirat, 1996; our own calculations from Weixner and Wimmer, 1997). This
perspective could have also blocked the project of extending Europe
eastward; but the price will be a more vulnerable Euro. The calculation
is simple: take sufficient Lira credits in spring 1998, change them into
Deutschmarks, spread the rumors, that the Lira will be devaluated, and pay
back calmly your credits with enormous profits, while the Lira goes down
the river Tiber
(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 met 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.
International currency reserves could melt further 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 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. Well-established German financial
institutes already more and more propagate Dollar savings accounts - a
clear sign how real the re-transfer of German savings into US $ already has
become, only temporarily halted by the currency crisis in Asia. 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. His
'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 in the long run after a calm start
(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 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 its 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). 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 were pointing in downward directions
for many years, only to recover slightly by now. This process was also
inexorably linked to the phenomenon of the wealth transfer in Germany into
foreign currency holdings. On paper, the USA face the same current account
balance trends - to be weighted at any rate by the role of the $ in
international transactions. Until recently, 'their' American-Asian-Pacific
economic space attracted - 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, flowed to that
region. Japan's high official current account balance also pointed in a
downward direction, but currency reserves go up - a clear indicator for the
hypothesis, that both legal and illegal world surplus capital flows into
Japan. Only experience will be able to tell us, how the recent currency
crisis in East Asia is connected to major possible 'tectonical shifts' in
international crime, international finance and surplus flows. It is
entirely possible that a briefer strength period of the European currencies
in the run-up to the EURO, will be followed months or years later, by a
renewed Asian-oriented flow. Let us not underestimate especially the
economic power of the Japanese Yakuza, the richest criminal organization in
the world. The profit opportunities for the international speculators are
enormous - 1997: rock the boat in Asia, jump in profits number one. Method:
lending of local overvalued currencies, selling it into $ or European
currencies. Pay back calmly your credits in local currencies, which are
severely down. Now, 1998: rock the boat in Europe. Method: lending of Lira,
selling it into $ or Asian currencies. Pay back calmly your Lira credits,
which are worth nothing anymore. Now, 1999: rock the boat in America:
Method: lending of $, selling it into Asian currencies. Pay back calmly
your $ credits, which are worth nothing anymore as Asia recovers and the
Arrighi cycle of financial transfers from the Atlantic to the Pacific nears
its finish; America then stumbles, because its current account.
On a world level, it is also 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) had a considerable power over 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. After the three-fold rock the boat strategy around the
globe is finished, the gangsters and speculators will have been able to
shift then this relationship decisively, to perhaps $bn 500 to 500 or even
worse. Already today, an alarming proportion of OECD country currency
reserves at any rate also stem from the proceeds of money laundering, as
the comparison between current account balances and international reserves
suggests:
Graph 9.14: International reserves of 20 narco states and 10 leading
western democracies
Legend: reserves - bars, left-hand scale; current accounts - dotted line,
right-hand scale. The currency reserves of the narco states are the
following:
20 narco states
324137
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
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 9.15: 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 9.16: currency reserves and current account balances since 1990 in
the world system - Germany, Japan and the USA compared
Legend: the following original data from Fischer Weltalmanach and Economist
were used:
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 9.17: unemployment, labor force participation rate and inflation in
developed capitalism
Since official unemployment statistics tell us only half the story about
unemployment, 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 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 9.18: 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 and her northern European partners indeed seem
to be inclined to a policy of monetarily regulating, if not dominating, the
chances for export of the European continent. Only a 'hard' EURO would
prevent profoundly enough the unwelcome low-value-currency-driven
competition from the European mezzogiorno countries, a competition, which
is, nota bene, partly the result of the run-away of German (and other
Northern European) productive capital abroad under present-day social and
policy 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 path would be to 'recycle' German and other northern European
savings into real transfers towards the Mediterranean EU countries, and
later, the East. But it would be politically unthinkable in the long run
and would create enormous pressures on the labor markets and for the export
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 9.19: 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. Short of direct speculation, the following swings could be
tentatively interpreted, without maintaining any rigor from that first
inspection of the empirical data:
Graph 9.20: 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. Since I am not a monetary economist, such a heterodoxy does not
bother me at all. Thus, we expect an underlying, basic strength of the US $
for 1997 and 1998, since America will have a stronger growth than Europe:
Table 9.12: 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 9.21: growth, consumer price rises (1997 in %) and changes in the
trade-weighted exchange rate, 1996/97
Legend: inflation and exchange rate dynamism
Post-hoc predictions from an anti-shock-strategy model for the real
observable data 1996-97 show, that the Graph above strikingly corresponds
to realities:
dyn exchange rate
trend dyn exchange rate 1997
One consequence of this empirical 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
Economist predictions of inflation for 1998
predicted inflation 98
2,9
Australia
2,3
Austria
2,1
Belgium
3,2
Britain
2,1
CND
2,7
DK
1,9
France
2,1
Germany
2,6
Italy
1,2
Japan
2,6
NL
2,6
Spain
1,7
Sweden
1,4
CH
3,1
USA
The consequence of this assumption then would be the prediction of the
exchange rate dynamics for 1998:
trend dyn er 1998
-3,896702
Australia
-2,60315
Austria
-1,848608
Belgium
6,774112
Britain
-1,022222
CND
-1,022222
DK
-5,621678
France
-3,285848
Germany
-1,848608
Italy
0,846082
Japan
-0,123992
NL
-1,022222
Spain
-4,438232
Sweden
-6,161048
CH
8,17525
USA
If you want to invest your money in Sterlings or US $, do it. Do not go in
for Swiss Franks, Deutschmarks, Swedish crowns, or French Francs, or Lira
(even worse):
Graph 9.22: $ 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 9.13: economic performance in Central and Eastern Europe, 1997:
GDP
budget
unemployment
inflation
current acc
reserves
debt
GDP, current account, reserves and debt are given in $bn, budget is given
as percent of GDP, unemployment and inflation are the usual percent rates
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.
Graph 9.23: stability criteria and economic performance in the
transformation countries
Graph 9.24: unemployment and inflation - the evidence from Eastern Europe
and the former USSR
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 inflation. 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. 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:
Graph 9.25: reserves and current account balances in the world system
Eastern Europe
developed western democracies
developing countries
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 balances, contributing to a dampening of the inflation
process in the semi-periphery:
Graph 9.26: 'excess reserves' (money-laundering) and inflation
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:
Table 9.14: stability conditions of Eastern currencies
inflation
current acc
reserves
debt
growth
constant
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:
Table 9.15: the balance of payments constraint on economic growth in the
transformation states
budget
unemployment
inflation
current acc
reserves
constant
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, as it is now underway, is about to put into
question. 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.