By Joseph Halevi, Faculty, International University College of Turin and Retired Faculty, University of Sydney<. Originally published at the Institute of New Economic Thinking website
These three INET Working Papers analyze the gradual emergence of the European Union and its monetary systems through early years of the introduction of the Euro. Their point of departure is the crucial role oligopoly plays in the evolution of modern capitalist economies and the dominating influence of the principle of effective demand in the dynamics of these systems.
These factors, though, cannot be understood apart from specific institutional and political conditions not simply in relation to fiscal and monetary policies but, and especially, in relation to the context of the international relations ruling in any given period. Arrangements that would have been conceptually and politically all but unthinkable prior to 1945 became the main pillars of Western Europe’s recovery undertaken under the aegis of the United Sates: The Marshall Plan, the creation of the European Payments Union, and the London Conference of 1953 leading to the drastic reduction of the German debt. In each of these the external factor, i.e., the balance of payments positions of the countries concerned took center stage. The balance of payments issue encapsulated the question of effective demand since for virtually all the Western European countries, including the Federal Republic of Germany, overcoming the external constraint by getting a slice of external demand, became the necessary condition for the expansion of investment in the domestic economy.
The first of this set of working papers on the political economy of Europe outlines the differences between the prewar and the immediate postwar features of the European economies. The paper then analyzes the marginalization of Britain through the balance of payments constraint and the refocusing by the United States on Germany, especially through the actions of John McCloy, whose companies were deemed best capable of creating synergies with the European affiliates of US multinationals in a de facto oligopolistic alliance. The essay argues that the US strategy towards West Germany required a particular policy towards France’s imperial interests, epitomized by the American financing of France’s expenses in the Indochinese war. Because of its determination to retain its status as a great power, France became the major factor of instability in Western Europe throughout the nineteen fifties and early sixties.
With the return to currency convertibility in 1959 the balance of payments of each individual country became paramount. As argued in the second paper, the prevailing policy framework in Europe excluded addressing the question in terms of the just disbanded European Payments Union. This was a creation of the Marshall Plan which helped a great deal to ease balance of payments constraints, especially in relation to the European countries’ deficit with the Federal Republic of Germany. Thus Western Europe as a whole instead of moving forward towards a Keynesian type management of the external balances, moved backward, with the respective countries taking non-cooperative stances on the issue.
The stop-go policies that Western European countries implemented 1960s were in fact a form of beggar thy neighbor policies under conditions of a fixed exchange rate regime. When the long boom ended, for reasons related to the Vietnam War and the international monetary system, the lack of an institutional system capable of governing both the US dollar and the internal fluctuations of the European currencies accentuated conflicts over each country’s external position. At the end of 1978 the European Monetary System (EMS) was founded as a means to shelter and secure the external position of the Federal Republic of Germany against those who opted for competitive devaluations, especially Italy.
The third and last essay covers the period stretching some 40 years from the formation of the EMS to just after the 2008 financial crisis. The EMS, which the Bundesbank did not quite fancy, proved to be an excellent arrangement for the protection of the external position of Germany, which had ceased to be the locomotive of Europe already during the 1970s. By inducing real revaluations of currencies such as the Italian lira and by strengthening the vent for the D-Mark provided by French economic and institutional elites, the EMS set the stage for the the formal creation of an austerian Europe. In truth deflationary policy ideas were always present at the very top levels of the leadership of many European countries. Perhaps the most significant case, thoroughly dissected by Alain Parguez in his 2016 article, is that of France.
During the 1980s three additional major steps helped enshrine austerity as the institutional form of policy making in ‘Europe.’ First Italy and then France formally severed the connection between their respective Treasuries and Central Banks, introducing the principle that government bonds ought to be financed from the financial markets. Moreover France’s socialist government made competitive disinflation the main plank of its economic policies. All this happened before the Maastricht Treaty and before the creation of the EMU. The paper goes on to analyze the vicissitudes leading in a very contradictory and conflictual manner to the formation of the European Monetary Union in 1999. Perhaps the two most important aspects of the period going from 1999 to after the 2008 crisis are the terminal decline of Italy, the roots of which go back to at least the early 1980s, when under the EMS Italy accumulated a large public debt mostly because of high interest rates, and the formation of an economic area led by Germany displaying a strong pull towards the East, towards China in particular. Some of the structural implications of this area for the future of Europe are also discussed.
 Parguez, Alain: “Economic Theories of the Social Order and the Origins of the Euro,” International Journal of Political Economy, Volume 45, No. 1, 2016, pp. 2-16.