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Time to break up the Euro

The broken Euro symbolThe European policy of Chancellor Angela Merkel is coming increasingly under pressure. Not only European Commission President Manuel Barroso, but also Enrico Letta, recently asked by Italian President Giorgio Napolitano to form the new governnnent, have criticized her austerity policies, which have been dominant in Europe and are leading to disaster. Europe’s leaders have long been at a loss. The economic situation is worsening from month to month, and unemployment has reached a level which is increasingly undermining democratic structures.

The Germans have not yet realized that the southern Europeans, including France, will in the face of the current economic misery be forced to fight back against German hegemony sooner or later. In particular, German wage dumping, which has been an infringement of the spirit of the treaties from the outset of the currency union, is putting them under pressure. Merkel will wake up from her self-righteous slumber when the countries which are suffering from German wage dumping get together to force a policy switch against the crisis at the cost of German exports.

A common currency could have been sustainable if the participants had agreed on coordinated productivity-oriented wage policy. During the nineties, when I considered such a coordination of wages to be possible, I was in favour of the establishment of the Euro. But the institutions established for that coordination, particularly the Macro-Economic Dialogue, have been circumvented by the governments. Hopes that the establishment of the euro would force rational economic behaviour on all sides were in vain. Today, the system is out of joint. As Hans-Werner Sinn recently wrote in the Handelsblatt, countries like Greece, Portugal or Spain would have to become 20 to 30 per cent cheaper than the EU average in order to achieve a roughly balanced level of competitiveness, and Germany would have to become 20 per cent more expensive.

However, recent years have shown that such a policy has no chance of being implemented. German employers’ associations and the neo-liberal block of parties — the CDU/CSU, the SPD, the FDP, and the Greens which are in hock to them — resisted the adjustment in competitiveness through rising wages which would be necessary in the case of Germany. A real depreciation through shrinking wages, which will make income losses of 20 to 30 per cent necessary in southern Europe — even in France — will lead to disaster, as we can already see in Spain, Greece and Portugal.

If real ups-and-downs are not possible in this way, then you have to give up the single currency and return to a system which allows for ups-and-downs, as was the case with the precursor of the monetary union, the European Monetary System (EMS). Basically, the point is to make possible once again controlled devaluation and revaluation through an EU exchange-rate regime run. Strict capital controls are the first essential step to regulate capital flows. After all, Europe has already taken this first step in Cyprus.

During a transition period, it will be necessary to provide aid to those countries which are certain to depreciate their currencies, in order to prop them up including aid through intervention by the ECB, to prevent a collapse. A pre-condition for the functioning of a European monetary system would be a reform of the financial sector and its strict regulation, along the lines of the public savings banks (Sparkassen). The casino banking sector has to be closed down.

The transition to a system allowing for controlled devaluation and revaluation should be gradual. A start could have been made in Greece and Cyprus. The previous experience of Europe with the snake has to be taken into account.

Oskar Lafontaine was the German SPD finance minister at the launch of the euro, and later leader of left party, Die Linke. This post first appeared at the Die Linke Saarland website.

3 Comments

  1. Syzygy says:

    At last, a politician saying the obvious. Perhaps, we’ll now find one who says that the deficit is too small and that if the private sector won’t invest, government must …

  2. BSCParty have long said that southern EUrozone Countries should run their original currencies alongside Euro to counter Unemployment. However Germany always inflexable has made the EUROZONE unattainable

  3. P Spence says:

    Oskar Lafontaine is a real heavy weight: Balls should consult with him. What he says makes good sense. Suppressing the wages of German workers 10 years ago lies behind much of the crisis.

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