By Barry Finger
The immediate crisis demonstrates, if there were any lingering doubts, that the architecture of the European Monetary Union is incompatible with countercyclical intervention.
It was designed solely to contain inflation at 2%. There is no central fiscal authority and no mandate to either maintain acceptable levels of employment or to sustain working class living standards against the ravages of the business cycle. As it stands, not one proposal emanating from Europe’s ruling classes attends to anything beyond saving its banks to forestall further private sector contagion, while asking these banks to accept nothing more than a modest write down of a small portion of their toxic assets. And even this request exempts the European Central Bank and the IMF. The further provision of underwriting loan guarantees to ailing private lenders to augment the hastily cobbled bailout fund is akin to recruiting kidney donors in a dialysis ward by offering them free health insurance.
The more ramified component is the imposition of draconian austerity on Europe’s southern periphery. It has only two functions with the same purpose: to transfer public wealth from debtor nations to private financial interests abroad, and to contract the internal price structure of these self-same nations in the vain hope that this will lead to an improvement in their balance of trade. And that is needed only to service foreign debt obligations and recapitalise the banks.
Therefore, even in the highly unlikely event that the balance of trade was to actually improve for the south — and not merely further balloon deficits as burgeoning unemployment imposes additional demands on these states — it would have little stimulative effect on the internal markets of European capitalism’s weak links. Funds that would otherwise supplement domestic demand would be drained to satisfy external debt obligations. And to the extent that the targeted nations contract, the living standards of German workers and their employers’ profits — whose livelihoods are codependent on the availability and expansion of foreign markets — would likewise be imperiled.
German balance of trade surpluses have hitherto provided the same internal function as government deficits would have by supplementing aggregate demand as their internal market shrinks. This, of course, makes the condescending lectures from German elites all the more insufferable.
The vaunted financial frugality of the Merkel government was only made possible by the wholesale transfer of income from the supposedly profligate south. The bailout package is simply a far more painful route to the same end.
If European economies maintained separate non-commodity moneys, foreign currency exchange rates would have the function of reducing units of labour of average skill and intensity in each national market into their foreign equivalents. Were a trade imbalance to persist, assuming exchange rates to be freely floating, this would signal the need for modifications in the pre-existing arrangements; a change in how the average labour hour expended in one economy is equated with the value creating power of an average hour in another. The eurozone was designed, on the other hand, as if labour power in its various national components were equally productive, that a worker of average Greek education and training would operate with the same level of efficiency in a German factory as the typical German worker. Under such hypothetical circumstances, there would be no a priori reason for nations to experience persistent trade imbalances.
The working class of the southern periphery of Europe however has not experienced the same mix of training, education and industrial discipline as its northern counterparts. A unitary currency therefore puts them at a dual disadvantage. It systematically “overvalues” the output of the periphery relative to the northern core. Therefore, unable to trade without running up huge deficits in their balance of trade, the south is also unable to compensate for this disadvantage by allowing its currency to float downwards. It can only, under existing circumstances, rebalance by deflating its entire cost structure — forcing aggregate prices below aggregate values — which would require being subject to prolonged semi-depression like conditions. This is generally unacceptable to the Greeks, bankers aside, for obvious reasons.
Otherwise, the persistent drain on aggregate demand (domestic spending) caused by the excess of imports over exports must be offset, all other things being equal, by government deficits on a one to one basis. These budgetary deficits, like the trade imbalances that invoke them, therefore take on the character of being a structural component of the system’s architecture. The relative portion of Greek government outlays composed of debt may undoubtedly be exaggerated by the ingrained habits of elite tax avoidance. But the absolute size of the debt itself is dictated by the leakages from the domestic economy itself, not by how effective the state is in harvesting its potential tax base.
Were there a politically accountable fiscal authority in the euro zone, the expansion of euros could be aligned solely to democratic — and structural and counter cyclical — considerations. Conceptually there are no apriori limits on the expansion of public demand denominated in a fiat currency, unlike a gold based currency, beyond the productive capacity of the system to accommodate the additional public demands placed on it. That limit is reached when demand expansion cannot induce any further capacity utilization or increased output. The system can then only respond to such additional demand by enhanced rationing via price increases.
But we have seen across the board that capitalist elites seek to confine the operations of the public sector to that which would remain feasible were it actually subject to the discipline of the gold standard. The euro zone architects accomplished this most directly by their deliberate failure to create a consolidated fiscal authority answerable to a European parliament. In compelling the operations of the various component states to finance their sovereign operations by filling the gap between tax revenues and expenditures with loans from private financiers, the European ruling classes assured themselves truncated democracies ever subjected to the discipline of the bond market.
But the dirty little secret is this. Fiat money contains within it the potential for euthanising the rentier class. It does so by providing alternative paths to finance public provisions at the central level that can be extended to its component states.
Liquidity does not first have to be pumped out of the private sector for it to then flow back to the market as state induced demand. Because the state (or in this case, the European Central Bank) is the monopoly issuer of its currency, it (or the European Union) is not revenue constrained. It does not need to operate by first diverting the stream of financial flows into the state so that the state can then access privately produced commodities.
This means that entities which are sovereign with respect to the issuance of currency, and whose external debts are payable in that currency, no longer need operate on the same financial basis as the private sector. There are no external limitations on the computer keystrokes (deposits) that sovereign entities can make to the accounts of private producers in payment for state purchases. The state does not need revenue on hand (tax receipts) or access to lines of credit (debt) before it can access goods and services.
Of course, the European Union is no different from the United States, Britain and every other state issuer of currency all of whose governing classes studiously refuse to exploit the openings this has created for fear of losing effective veto power over the state.
There are many good egalitarian reasons to tax the rich. And they stand on their own merits. But a countercyclical program requires an increase in net spending, not merely an equal transference of spending power from the rich to government. A policy that redistributes the incidence of taxes from the working class to the wealthy, without any net additions to aggregate demand, simply finances existing outlays on a more “equal” basis. (Of course, “equal” in this context is a misnomer insofar as all taxes paid by the rich were first pumped out of the working class by capital through their appropriation of surplus labor time.) So for “taxing the rich” to be an expansionary demand as well as a limited demand for justice, there must be parallel tax relief for the working class that exceeds the additional taxes imposed on the wealthy.
But overhauling tax codes is the most roundabout means to countercyclical ends.
The only immediate way to break the grip of Wall Street and the Bourse over the state is to press for a real democratisation of fiscal authority. The expansion of “entitlements” and mass public works projects are dependent only on the willingness of the state’s central bank to create demand ex nihilo, an operation that fiat money arrangements fully support.
Capital is understandably wary of this. And it is not only because of the tight labour markets and enhanced working class power that this would sustain, though this is undoubtedly always a consideration. Business suspects that the expansion of induced profits would fall short of the additional future taxes needed to service and retire the ballooning public debt now summoned into existence to set this process in motion. And if the system was indeed subject to the discipline of the private bond market — as it is under current arrangements — such suspicions would be well grounded.
But this again represents an inverted understanding of the mechanics of public debt and taxes under a fiat system of money. If this is a constraint, it is by legal alignment rather than operational necessity. When the state spends, it actually injects an asset (dollars, pounds, or conceivably, euros etc.) into the private sector. It can simultaneously neutralise this additional demand through taxation; or it can issue a bond for the same amount thereby swapping the non interest bearing asset (dollars, pounds or conceivably euros) for an interest bearing asset on a one to one basis.
But the point is this: government spending, taxing and bond issuance are three separate and distinct operations. Public spending per se creates a net addition to private assets. This means that bond issuance involves no actual borrowing from the private sector whatsoever. The sole purpose of bond issuance is to allow government to influence interest rates levels in the private sector. Fiat money eliminates the need for any state reliance on the private banking system; it eliminates any need to face the consequences of “sovereign” debt crises. In the hands of socialists it would mean euthanasia for the rentier class; the complete severance of governmental operations from the private banking system and a huge victory in the war for democracy.
There are no shortages of excellent socialist proposals for a Greek workers’ government. Some have advocated a go it alone policy, while others have conceded that any actions needed to realise a left program would certainly result in the expulsion of Greece from the euro zone.
Either way, this would entail the reintroduction of a national fiat currency, the drachma, and either a debt default or a write down of debt payable in drachmas. Workers in the European core would be squeezed to compensate for the banking losses that capital will insist has been imposed upon them by “irresponsible” Greek workers.
Though a Greek workers’ government would have all the benefits that fiat money accesses, the retaliatory trade barriers that will likely ensue would nevertheless wall them in. From north to south, all the reactionary nationalist poisons would be unleashed throughout the continent.
Any real program based on working class internationalism should build instead on the democratic openings made possible by fiat money. In the US and Britain this struggle first needs to expose the “debt” crisis for the complete farce it is. It is nothing more than the capitalism holding democracy in check as the profit system unravels.
But for the southern periphery of Europe, whose national constituents cannot issue their own currencies, this ideological struggle also demands a continent wide struggle for an overhauled, consolidated fiscal authority under democratic supervision. If the euro system is to be maintained for the convenience of capital, the periphery will need to run perpetual deficits until the continental level of working class productivity is equalized. And beyond that, the general need for countercyclical spending would mean that the European Central Bank would have to finance the additional deficits that arise in all member states when capital accumulation stagnates.
There is absolutely no reason why these deficits, whether structural or conjunctural, need to be underwritten by the private financial sector with all the punitive measures and restrictions this entails both to workers in the periphery and in the core of Europe.
For now, it is death to the rentier class and not the call for isolated workers’ governments that allows a way out for Europe’s rank and file.