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.
 Storm, Servaas: “Lost in deflation: Why Italy’s Woes are a Warning to the Whole Eurozone,” Institute for New Economic Thinking Working Paper No. 94, 2019, Wp 94 Storm Italy
When the long boom ended, for reasons related to the Vietnam War and the international monetary system,
No mention of the tripling of the price of oil? That had an effect in raising both costs and prices.
Could not the EU itself be considered an austerian institution at this point as well? It seems that neoliberal financiers are largely the ones at the helm of EU leadership. While I am not as well-versed on the history of the EU as many of the commenters here are, it almost seems like the EU was a neoliberal project from the very beginning rather than just having morphed into one.
I have somebody from the UK as a manager where I work, and he is very much in the #Lexit camp so I am getting a lot of information from him, even by his own admission of political bias.
Since the EU leaders are neoliberals, the EU itself could hardly be anything else but neoliberal. The reality is that pretty much every major European country has elected neoliberals or ordo liberal governments since the mid 1980’s at least. It’s hardly a surprise that the EU reflects this. But I think its a mistake to characterise the EU as inherently neoliberal or austerian. It largely reflects the politics of the main countries. In reality, when you look at policies that originate from the EU, they are a complete mixed bag – some unquestionably neoliberal, some (especially with the euro) heavily ordo liberal, but many also drive neoliberals nuts, especially with regard to workers protections and environmental protection. It was primarily the latter which drove many right wing Brexiters to oppose the EU so strongly, especially Rupert Murdoch, who was allegedly furious that the EU takes competition law (i.e. anti-trust law) seriously, unlike most national governments.
Thanks for mentioning Murdoch PK. You must remember the Referendum Party too?
Worker protections means very little in an open-borders union. As for the environmental regulations of the EU, well yes: those do impose costs on business. But it should also be pointed out that they give an unfair advantage to the large multinats, which can more easily absorb those costs than the smaller Mittelstand firms. And of course, these regulations also have the effect of keeping ‘environmentally unsound’ competitors out of the EU market completely, so they are a back-handed form of protectionism, too. (And that’s an example of what Trump and his backers in America detest about the EU.)
“Worker protections means very little in an open-borders union.”
EU wide worker protections work in an open-border union; the problem is that such worker protections are lower than what they used to be. For example Germany and Italy had a strong increase in temp workers, that were illegal before the 90s.
Then various politicians had the idea of increasing “competitiveness” (that is, keep wages down) and legalised temp contracts big time, so that de facto worker protections went to the scrapper.
But this was a choice made by the local governments, because Italy and Germany certainly would both like to stay competitive EU or not EU.
The effect of this clearly dwarves any supposed effect due to migration.
This also had the effect of pushing down internal demand in both Germany and Italy, but while Germany managed to boost its exports big time, Italy didn’t and this caused and is still causing a lot of problems.
“And of course, these regulations also have the effect of keeping ‘environmentally unsound’ competitors out of the EU market completely, so they are a back-handed form of protectionism, too”
Either these regulations help multinationals (so they are not protectionism) or they are protectionism and therefore help local “smaller Mittelstand firms”, please pick one.
Certainly William Mitchell is firmly of the opinion that the Euro Zone is a neoliberal nightmare from the word go:
More from Mitchell and Fazi in this vein here:
I’m reading the paper linked in note , and I think that that paper gives a clear explaination of the EU conundrum (although the paper is about Italy, where I live, other EU countries suffer from the same problems but at a lower level).
– On the one hand, EU economies suffer from a shortfall in demand, that curbs both employment and productivity growth (as there is less reason to invest);
– on the other hand each EU country competes with the other so that there is a clear race to the bottom in wage growth, that in turn exacerbates the shortfall in demand.
So to the question of wether the EU is neoliberal or not, the real question is: would the race to the bottom be faster in absence of the EU (because every EU country would just ignore every standard to win the competition) or would it be slower (because every EU country would trade less with the other and push more on the internal demand)?
In my opinion the race to the bottom would be faster without the EU, and in facts the only way to stop it is to have a stricter union and a common expansive fiscal policy, because there is too much leakage for every EU country to go into fiscal expansion alone (plus as the article makes clear there is also a big problem of worsening labor law that should be stopped).
I remember back 25 or so years, when attending a summer enclave in New Hampshire, a discussion group was led by an economist trying to explain the mechanisms and policies of EU organization, and a question was raised about the decidedly pro-capitalist policies enacted during the run-up to austerity that would be in full bloom later. The economist became very defensive, and at one point said the unions and citizens had no choice but to go along with such policies, the EU as an organization being “far more important” than the citizens of it. While a supposed Leftist, the economist showed something some smarter people could have seen coming — a turn to authority outside the class organs he said he supported. Left not a few citizens in the dust there.
This is a good point in human history to start an inquiry into the rationale for “Financial Markets”. Because now, they too have crashed and burned in the pursuit of fantasy. ” In the 1980s the Italians and the French began using the financial markets to finance government bonds.” Dumbest thing that ever happened. Not that the USA was so shrewd – we just did whatever needed to be done to make the “system” work. It was a losing battle, but aren’t they all? Does anybody else remember the goofy Ronnie R. requesting personal instruction from the Italian BCCI bankster on how to loot yer banks. Weird policy to be sure. Whoa – let’s do that! And in fact that is when all the looting started in this country. All things economic, by 1980, must have been flat on their ass. (Bec. of our obsession with the delusion that money had intrinsic value.) We scurried off to China looking for new demand and Germany followed, dragging the future EU behind them. There’s so much stuff here, I’d like to read several volumes. At this point, today, the neoliberal austerians deserve an honorary concession at Disneyland. Synopsis: we wanted to create a prosperous and peaceful world but we could see that money was the logjam. So we did everything we could, including throwing gold out the stupid window in 1971, to create a decent world. I honestly believe that. We were smarter than the rest of the world. And then when it didn’t work, because greed and ignorance, it took a long time for the shit to hit the fan. Forcing capitalism to go into an absurd overdrive which destroyed the environment and all the things we actually do value. That’s where we find ourselves now. And it has more to do with unregulated capitalism and “financial markets” than any other single thing. So when did sanity disappear? Let’s go back and pick it up. OK?
The EU and the Euro were first proposed, albeit with a different name (mitteleuropa) in a plan released by the German army HQ in 1916.
Reference: Ring of Steel: Germany and Austria-Hungary at War, 1914–1918 is an award-winning book on World War I by Alexander Watson.