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LET THE EURO GO AND START AGAIN

No currency without democracy

The euro will fail, and the Eurozones member states will revert to national

currencies. That may be the only way to create, a new euro with a proper

future, on a different foundation.

BY FRDRIC LORDON

Many people, especially on the left, still believe the euro can change, that it can be

transformed from a euro of austerity into a renovated, progressive, social euro.That will never happen, and you could guess as much from the lack of political

control that is the result of the institutional paralysis of the European monetary

union.

The euro in its present form was created by a structure that has given, and was

designed to give, full satisfaction to the capital markets and has allowed them to

ain control of Euro ean economic olicies. An attem t to chan e the euro

September 2013

We cant go on like thisThe court of democracy

Egypts new friends*

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Turkeys ailing sultan

No currency without democracy *

Where the future is s till nuclear *

>>

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significantly would be an attempt to dismantle the power of the financial markets

and exclude international investors from the formulation of public policy. The

markets will never accept any project clearly designed to deprive them of their

disciplinary role. As soon as any such project gained political weight, it would start

a storm of speculation and a market crisis, allowing no time to set up an

alternative monetary structure and resulting in immediate rev ersion to national

currencies.

The choice for those on the left who persist in believing reform is possible is

between indefinite powerlessness and the advent of what they say they want to

avoid rev ersion to national currencies as soon as any reform initiative starts to

be taken seriously. By the left, I do not mean the (French) Socialist Party (PS),

which remains linked to leftwing ideals only by semantic inertia, nor the

amorphous mass of Europeanists who have just discovered the flaws in their ideal

and are horrified to realise it could soon fall apart. But making up for a long

intellectual slumber will take time. The rush for rescue has begun in slight panic

and total unpreparedness.

The ideas on which the Europeanists place their last hopes eurobonds,

economic government and even the democratic leap of President Hollande and

Chancellor Merkel (you can just hear the Ode to Joy) are illusory solutions for

those who have never asked any questions and are unlikely ever to understandwhats going on. Maybe its less a matter of understanding than accepting that the

EU is actually a huge system of political larceny.

What has been stolen is popular sovereignty. The right wing of the left, who are

fanatically pro-Europe, dislike all talk of sovereignty. I t has never occurred to

them that sovereignty (meaning sovereignty of the people) is another name for

democracy. Do they mean something else when they talk about democracy?

Renewable energy *

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The fashion for boy-girls *
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Denial of democracy

The denial of sovereignty in Europe is an unconscious denial of democracy. To

make people forget this loss, the Europeanists claim there will be a dangerous

retreat into nationalism. There is much fuss about the French Front Nationals

success in opinion polls, but nobody wonders whether this might be connected to

the destruction of sovereignty, not as the mystic exaltation of a nation, but as the

power of a people to control their own destiny.

What is left of sovereignty in a structure that has deliberately chosen to neutralise

economic policies budgetary and monetary constitutionally, making them

subject to automatic rules of conduct set out in treaties? T hose in favour of the

Treaty Establishing a Constitution for Europe (TCE) of 2005 pretended not to seethat the main argument against it lay in Part Three. This had been a part of the

treaty since Maastricht (1992), Amsterdam (1997) and Nice (2001), and each of

these had reaffirmed the suppression of the central requirement of democracy:

that public policies should be reversible and subject to re-evaluation.

When everything is set down once and for all in irrevocable treaties, there is

nothing to be re-evaluated, let alone discussed. Monetary policy, manipulation of

budgets, levels of public debt, forms of deficit financing: these key economic levers

have all been set in stone. How can there be any talk of desirable levels of inflation,

when inflation has been made the responsibility of an isolated, independent central

bank? How can there be any discussion of budget policy when the Golden Rule

has been laid down? How can debt be repudiated when member states can no

longer get finance except on the capital markets?
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The Europeanists dont have any answer to these questions (indeed they implicitly

approve this constitutional state of affairs), so their feeble ideas always overlook

the central issue. The PS has been talking about economic government of the

Eurozone for the last 20 y ears, but what can that mean when there is nothing left

to govern, everything governable having been locked away in the European

treaties?

Aggravating the political flaws

Eurobonds (seeEurobonds) presented as a great leap forward through financial

sophistication, have none of the properties their inventors ascribe to them.

Germany, which enjoys the lowest interest rates when it borrows on the markets,

sees v ery well what backing the countries of southern Europe would cost. If it

accepted that price for the sake of pursuing the European ideal, it would surely

demand (in return for participating in the financial mutualisation), extra,

draconian powers of supervision over and interference in national economic

policies, just as it placed restrictions on those policies, through treaties and pacts,

when it joined in the monetary mutualisation.

Far from reducing the political flaws of the present structure, eurobonds would

aggravate them to an unprecedented degree. Germany would not agree to enter

into the financial solidarity mechanism of a mutualised debt, and foot the bill if one

of its partners defaulted, without demanding, through the intervention of a

strengthened Commission, far-reaching and permanent supervisory powers, and a

procedure for placing erring partners under supervision. Tighter automatic

constraints and troika supervision are the only likely results of eurobonds a

worsening of the political crisis Europe already faces.
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This generalised dispossession of sovereignty is attributable to Germany. It is the

only acceptable solution to Germany when it comes to sharing an economic and

monetary destiny with nations it judges incapable of exercising their sovereignty

except to bad effect. Hence it advocates general neutralisation. Only Germanys

sovereignty is left intact, and transplanted into European economic and monetary

institutions.

The frequent and stereotypical horror at any questioning of Germanys actions

reveals a great deal about the horrified. As is often the case with inverted racists,

whose exaggerated protestations of friendship allow them to avoid analysis, it may

be that those who are most vexed by the German question are those who profess

to love Germany.

Germanys cult of the euro

Between loving and hating Germany, there is room for objective analysis of

structural characteristics and historical heritage, and of the compatibilities or

incompatibilities encountered when trying to get different countries to live

together at a high level of integration. Germany has fostered a cult of the euro,

giving the euro such a central role that it is unable to make the slightest

concession. Germany only agreed to join the euro on condition that it would be

able to dictate the euros institutional architecture, based on its own.

Germany believes that the hyperinflation of 1923 prepared the way for Nazism

(although it is far more likely that the deflation of 1931 was responsible), and acts

accordingly. Nobody can blame Germany for its history, or for believing in the

stories it has told itself to explain that history. Nobody can blame Germany for

having a unique vision of what a monetary order should be, and for refusing to


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enter into any order that differs from that vision. But it can be criticised for

imposing its obsessions on everyone else. And while it is legitimate to allow

Germany to pursue its monetary obsessions, it is also legitimate not to wish to

pursue them with Germany especially if those principles are unsuited to the

economic and social structures of the other member states and may be disastrous

for some.

Some member states need devaluation, others need to allow their deficits to grow,

to repudiate part of their debt or to allow inflation. Every state needs these things

to become legitimate subjects for democratic discussion. But Germanys principles,

which are written into the treaties, forbid that.

There is nothing at all to be hoped for from the democratic leap. The

reactivation of a federalist project is highly uncertain nobody has said what it

would involve, and nobody has considered the conditions that would make itpossible. Can the advocates of greater federalisation describe the miracle that

would persuade Germany to accept that all the questions it has worked so hard to

exclude from democratic debate should be readmitted to it? And do they believe

that a federalism in which discussing these issues is still prohibited by the

constitution would represent a democratic leap (1)?

Let us suppose that a fully fledged European federal democracy has been

established, with European legislative powers worthy of the name, with twochambers, enjoying all the normal prerogatives, and elected by universal suffrage.

Can those who dream of changing Europe to overcome the crisis (2) imagine

Germany abiding by the decision of the European majority if this sovereign

parliament were to decide to retake control of the central bank, allow monetary

financing of member states, or remove budget deficit ceilings? T heir reply

obviously no would be the same (we hope) if European majority rule were to
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require France to privatise its social security system. What if France had imposed

its own model for social security Europe-wide, as Germany has imposed its model

for monetary order, and made it the object of an ultimatum?

Debate and majority decision

The architects of federalism need to realise that the democracy is not just made up

of formal institutions, and that it cannot thrive, or even exist, without a foundation

of shared sentiments, since this alone can persuade the minority to accept the

decisions of the majority. Democracy is debate followed by a majority decision.

The senior civil serv ants (and economists) who have no political sense, yet make

up the greater part of national and European political personnel, cannot see this.

Their intellectual inadequacy is responsible for institutional monsters, ignorant of

the principle of sovereignty. The democratic leap looks as if it will disregard theemotional conditions necessary for democracy, and the difficulty of satisfying those

conditions where many nations are involved.

Given that reversion to national currencies would fulfil all these conditions, and

would be technically practical provided it was attended by appropriate auxiliary

measures (especially for the control of capital) (3), it is clear that the European

project is not entirely hopeless. There can be no single currency since that would

require a proper political structure, which for the moment is out of reach. But the

idea of a sharedcurrency is worth pursuing, especially as there are still good

reasons for Europeanisation, providing the disadvantages do not outweigh the

advantages.

The balance would become favourable once more if, instead of a single currency,

there were a shared currency a euro with national denominations such as the
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euro-franc and the euro-peseta. These national denominations would not be

directly convertible into other currencies (dollars, yuan), nor among themselves.

All exchange, external and internal, would go through a new European central

bank, which would act as a bureau de change (see Convertibility) but would have

no authority over monetary policy. This authority would be returned to national

central banks, and governments would have to decide whether or not to retake

control of these.

External conversion, limited to the euro (4), would take place in the normal way

on the international exchange markets, at variable rates, but via the European

Central Bank (ECB), which would be the only player for European agents, public

and private. Internal conversion, among the national denominations of the euro,

would take place only via the ECB, at fixed rates, decided by governments.

This would rid us of the intra-European forex markets, subject to repeated crisesunder the European Monetary System (5), and protect us from the extra-

European forex markets. These properties would constitute the strength of the

shared currency.

Once the myth of automatic convergence of European economies was dispelled, it

would become possible for economies that need to devalue, especially during the

present crisis, to do so. A system of internal convertibility of a shared currency

would allow devaluation, under controlled conditions. The experience of the 1980sand 90s shows the impossibility of orderly forex adjustments in the midst of a

storm on the fully deregulated financial markets. The internal calm of a European

monetary zone freed from forex markets would make it possible to devalue by

political processes, and it would be up to the member states to agree a new parity

grid.
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Back to Keynes

An internal convertibility sy stem could be configured like the International

Clearing Union proposed by John Maynard Keynes in 1944, which, apart from

allowing countries with major external imbalances to devalue their currency,

would also have obliged countries with major surpluses to re-evaluate. Such a

system would compel member states to re-evaluate gradually, according to a

series of surplus thresholds (set at 4% of GDP, then 6%). Germany would long ago

have had to agree to an appreciation of the euro-mark, supporting demand in the

Eurozone and helping to reduce internal imbalances. The rules for forex rate

adjustment would make up for the predictable unwillingness of countries with

surpluses to cooperate in negotiations.

Orthodox neoliberals cry inefficiency or inflation as soon as there is any talk of

devaluation. Yet devaluation is what they constantly advocate, though what they

plead for is internal devaluation, through lower wages (and unemployment, which

depresses wages), rather than external devaluation of forex rates structural

adjustment rather than adjustment of monetary parity. If the Germans were to

leave the euro, they would soon realise this. A decade of wage restraint would be

wiped out in two days by the re- evaluation of the neo-deutschmark.

Inflation, which would require structural adjustment rather than monetary parityadjustment, is just a bogeyman when there is a far greater threat from deflation (a

general fall in prices), which is at least as dangerous and which would necessitate

controlled reflation, if only to reduce the burden of debt.

But surely this lightening of the debt burden would be overshadowed by an

increase in the burden of external debt, caused by dev aluation? A devaluation of


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10% against the dollar would make the burden of dollar-denominated debt 10%

heavier. (Note that in France, as Jacques Sapir has shown, 85% of the debt has

been issued under contracts governed by French law would be redenominated into

euro-francs, so that devaluation would have no impact.)

But the issue of a shared currency goes far beyond simply restoring the option of

devaluation, which, at present, is a vital freedom, but not a universal remedy.

Leaving the current euro is much less a matter of macroeconomics than of

asserting popular sovereignty the basic condition for democracy.

A scaling down of European ambition

If the emotional preconditions for popular democracy at a supranational level are

still out of reach, realism demands that the European ambition be scaled down,

although this does not mean abandoning it altogether. It should (to counter any

accusations of retreat into nationalism) be pursued vigorously in all areas other

than economics. As to the economic ambition itself, we must decide its scale. It

should not involve 28 or even 17 member states: that would guarantee failure.

The number should be based on objective assessments of compatibility, assuming

a minimal degree of homogeneity of lifestyles the same, or a similar, way of

thinking on social models, concern for the environment and a prior agreement

on the broad principles of economic policy. Such coherence is probably out of reach

for all but a small number of member states at present. It can sometimes be

assessed on the basis of convergence indicators, though not those of the

Maastricht treaty.

If the goal were to create a large market as a basis for the shared currency, it

would be important to admit only economies with similar socio-productive models


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and similar cost structures. Only countries whose minimum or average wage was

at least 75% or some other appropriate proportion of the average of the

minimum or average wages of the other member states would be admitted. This

complete reworking of the European structure would be an opportunity to be rid

of the madness of monetary and financial orthodoxy, of across-the-board

structural adjustment, and of the evils of non-distorted competition, which

accommodates structural, social and environmental distortions, and is designed toencourage them to exercise their maximum violence.

The idea of replacing the present euro with a reformed and progressive one is

hollow. If it were progressive, the financial markets would never allow it. The

choice is between remaining bogged down in a liberal euro, slightly modified by a

few second-rate ideas, and a head-on collision with the financial markets, which

are sure to win, though they will ultimately lose everything, since their victory will

destroy the euro and create the conditions for its reconstruction on lines that willexclude the markets.

A forced reversion to national currencies will seem like a failure and will have

politically depressing effects, hindering for a time any attempt to re- launch the

European project. That is why the likelihood of an eventual re-launch depends on

the manner of leaving the euro. Setting aside political energy to tide Europe over

the interim period of national currencies would imply backing the idea of a shared

currency provoking the explosion of the markets by announcing this plan and

presenting it as the political ambition of some European countries, rather than

presenting reversion to national currencies as the only possible outcome of this

confrontation. It will not be possible to avoid reversion to national currencies, but

the way in which that return takes place will determine the chances of any future

euro.


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Unless Europe slips forever into the coma of the antisocial euro, this reversion will

come. That is the penalty for having a structure unable to adapt because it has

deprived itself of all freedom to change. The only options for a super-rigid

structure are to resist as long as the external shocks it faces are not too powerful,

or to break.

Europeanists will protest that Europe is making progress. The European Financial

Stability Fund (EFSF), the European Stability Mechanism (ESM), the purchase of

sovereign debt by the ECB (6), banking union: all these are advances won at

considerable cost, but real. Unfortunately, and unsurprisingly, none tackles the

heart of the structure, that hard core from which come all the depressionary and

anti-democratic effects, including the exposure of economic policy to the financial

markets, an independent central bank, an anti-inflationary obsession, the

automatic adjustment of deficits and a refusal to countenance their monetary

financing. So the advances remain peripheral, only mitigating where possible thedisastrous consequences that the hard heart produces. Europe goes on addressing

the effects, without tackling the causes. It remains incapable of fundamental

reform and unaware that a break-up is the only possible outcome.

Eurobonds

Eurobonds are a mutualisation of public debt in the Eurozone. The various

sovereign debts, up to 60% of the GDP of the member states, would be

considered as undifferentiated European debt, for which all the member

states would be collectively responsible. If one member defaulted, the others

would act as guarantors. Under other proposals, sovereign debt over 60% of

GDP would be mutualised. It is above 60% that the guarantee effect is most

See also

Translated by Charles Goulden
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The staff- Contact us Republishing enquiries

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useful but also most likely to be called on.

Convertibility

A Spanish company that needed to pay a French company would have to ask

the European Central Bank or its network of agencies, or ordinary banks

handling foreign exchange functions on its behalf to convert its euro-

pesetas to euro-francs at the fixed exchange rate in force.

A US company that needed to pay a bill in France would convert dollars to

euros on the external forex markets, at the current fluctuating rate, and

would then ask the European Central Bank to change its euros into euro-

francs at the fixed euro/euro-franc exchange rate.

If the euro-franc fell by 5% against the euro, it would naturally fall by 5%

against all other national denominations of the euro and the dollar. A French

company would then have to pay the ECB 5% more for the euros it needed to

pay the same bill in euro-lire or dollars.

More by Frdric Lordon

(1) See Serge Halimi, A federal Europe, by order, LeMonde diplomatique, English ed ition, July 2012.

(2) Thomas Piketty, Changer lEurope pour surmonterla crise (Changing Europe to overcome the crisis ),Libration, Paris, 17 June 2013.

(3) For example, by setting quotas for some types offinancial transaction, or banning them altogether.

(4) National denominations (the euro-franc, euro-lire,etc) would have to be converted to euros before beingconverted to dolla rs.

(5) The EMS (1979-1993) involved fixed exchange ratesbut allowed a fluctuation margin of +/2.25%. It wasthe difficulty of maintaining the central points whileallowing complete freedom of movement of capital thatled to the repeated crises of the EMS.

(6) The FESF and MES are two funds created toprovide financial assis tance to Eurozone countries.Outright Monetary Transactions is a European CentralBank programme for the purchase of sovereign debt.

Frdric Lordon is an economist and author of La crisede trop: Reconstruction dun monde failli(One CrisisToo many: Rebuilding a Failed World), Fayard, 2009
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