The European Monetary System MEETING ON January 11-12 in Brussels, the twelve finance ministers of the European Economic Community (EEC) decided to make adjustments to the European Monetary System (EMS).
The fall of the US dollar, affecting all the financial markets, has led to speculation and consequently a rise in the value of the German mark. But it also meant a fall in the weakest EMS currencies, especially the French franc. France refused to devalue for a second time in less than a year - the last devaluation followed the March 1986 elections.
The EEC ministers reached a shaky agreement. The German mark and the Netherlands guilder were revalued by 3 per cent, the Belgian and Luxemburg francs by 2 per cent. In fact, no sooner was the ink dry than this EMS agreement was threatened again by the dollar's decline, continuing in spite of intervention by central banks. ERNEST MANDEL
ECONOMY powers.
The United States' lead in industrial productivity was gradually eroded. The part of the world market monopolized by American commodities declined. European and Japanese capital exports little by little grew in parallel with exports of their industrial products. Multinationals stopped being essentiaily American or Canadian and became Japanese or European (or simply German, British, Swiss or French).
The United States has suffered from a chronic balance of payments deficit. The gold reserves deposited at Fort Knox melted away. America could not maintain the dollar's convertibility into gold, and in 1969-72 it was • abolished. The international monetary system established at the end of World War II - the Bretton Woods system - collapsed. (1)
The dollar was no longer "as good as gold". Exchange rates between currencies became increasingly chaotic. They were increasingly unstable, as they were in the inter-war years. The result was a series of ups and downs in exchange rates.
This instability and deepening insecurity favoured speculation rather than production, short-term investment (including daily flights of capital) rather than medium- and longterm investment, which is decisive for improving and expanding production. This strengthened the tendency for economic growth rates to fall and for production to stagnate. We went from an "expansive longwave" to a "depressive longwave", , which began in the late 1960s and the early 1970s. It is still continuing and will last a long time yet. It has many similarities with the inter-war years.
The capitalist economy, like nature, abhors a vacuum. The dollar's decline stimulated a rise of other currencies, above all the Deutschmark and the Japanese yen, as international currencies: currencies used for international exchange; currencies in which international borrowing is expressed - bonds issued by firms, or by part or wholly state-owned enterprises; currencies used as reserves for other national currencies, and so on. (2)
But this rise was very modest. Today it concerns at the most 10 to 15 per cent of the movement of goods and capital in the world market. Neither West Germany nor Japan occupy a place on the world market comparable to that of the United ment threw out the post-war basis of The 1944 Bretton Woods Agreethe international monetary system and created the International Monetary Fund (IMF). It also established the dollar as the only currency convertible into gold.
See 'The beginning recession" by Ernest Mandel, 'International Viewpoint' No. 106, October 13, 1986.
3
The capitalist economy is a monetary economy. Production is the production of commodities: nearly everything that is produced must be sold. Selling is an exchange of commodities for money.
But the capitalist economy is also international. The world market is structured by national economies, each having its own currency. Like armies, if not more so, currencies are the marks of national sovereignty. These currencies relate to each other through an international monetary system. It follows from this that the functioning of the capitalist economy is closely dependent on the relative stability and functioning of this international monetary system.
Until World War I, capitalist development • was particularly distinguished by the stability of the international monetary system based on the gold standard. Most of the big capitalist powers - and quite a few oi the smaller ones - had national currencies covertible into gold. As the currency of the strongest imperialist power, Britain's pound sterling was a stable as gold.
structural crisis of world capitalism from 1914 on was reflected in a crisis of the international monetary system. The gold standard was abandoned by one country after another. No national currency could substitute for gold for all countries.
The world market fragmented into different regional zones, each having its own base currency. Global commerce contracted and production tended to stagnate or to fall.
The crisis of the international monetary system was strictly related to increased inter-imperialist competition. Following World War II, this situation was completely changed. In the capitalist world (that is, outside of those regions where the capitalist regime was abolished), the United States emerged as the leading industrial and military power. Its financial supremacy corresponded to this economic and political dominance.
The currency system functioned on the basis of a dollar-gold standard. The dollar was a stable as gold, convertible into gold. It was used as a reserve currency for the other currencies. The international monetary system was relatively stable. World trade expanded greatly, stimulating the expansion of production. A quarter of a century of accelerated economic growth (an "expansive longwave") replaced in the long term the quasi-stagnation that stretched from 1913 to 1940.
But American dominance did not last forever. It was demolished by the spectacular resurgence - first industrial, then also financial - of West Germany, Japan and, to a lesser extent, of the minor European
International Viewpoint 9 February 1987
States from 1940-1970, or to that of Britain from 1850-1890. West Germany or Japan do not have industrial or military dominance that could substitute for American dominance. So it is not materially or politically possible for the Deutschmark or the yen to play a role similar to that played by the dollar during the long phase of expansion following World War IT. Pressure grows for a European currency
At first sight, the situation seems different if one looks not just at West Germany and Japan taken separately, but at the six countries originally constituting the Buropean Economic Community (EEC) - West Germany, France, Italy, the Netherlands, Belgium and Luxemburg - or indeed the twelve countries now members. These include the six already listed plus Britain, Denmark, Ireland, Greece, Portugal and Spain. In the world market of commodities and capital, these EEC countries occupy a similar position to that of the United States at the end of the 1950s and the beginning of the 1960s. Theoretically, they could create a new monetary pivot for world trade and partially remedy the chronic monetary instability.
We say partially because, even if there were a common European currency and real monetary stability in Europe, the relations between such a currency and the dollar on the one hand, and the yen on the other - not to mention relations with the currencies of the main semi-industrial powers of the "third world" such as Brazil, Mexico, South Korea, Taiwan and South Africa - would remain subject to sharp fluctuations owing to the demands of competition.
That explains the constant pressure exerted for some years in favour of the emergence of a European cur. rency, which already has a name -the European Currency Unit (ECU) -and an existence on the borderline between the real and the phantasmagorical.
The emergence of a European monetary system based on the ECU also corresponds to the tendency for the Common Market to consolidate itself. It expresses the needs of the big trusts, monopolies, multinationals and banks that are mainly Europeanowned. Faced with American, Japanese or other competition, they want to see their interests in the world market better defended by a centralized force, than they are by nation states that are clearly not up to today's international forms of or4 ganizing production and capitalist finances.
But the very conditions that favour the birth of the ECU, a European monetary system, simultaneously limit is extent, field of application and efficacity. I said earlier that, in the framework of a trading economy, a market economy, the existence of an autonomous currency is one of the major marks of national sovereignty. The term "mark" should not be interpreted in a symbolic or ideological sense, or even as the expression of the "will" of the possessing class. Above all it is a real manifestation of strength, of a state's economic and political power, meaning the power of its ruling class or classes.
For a currency to be a true currency, it has to have a real state capable of defending it with all necessary means: exchange reserves, custom controls, its own commercial policies regarding foreign competition and control of exchange, which can seriously disrupt - if not stop -the outflow of capital. This implies that there is a single central bank, a single financial and social economic policy and a real government.
However, the Common Market has none of these instruments and prerogatives of a true state at its disposal, except a common customs system and some scraps of pseudopower in related areas such as the "common" industrial and agricultural policy and in particular considerations only. The EEC is not yet a real state, a real federation. It is a quasi-state, a semi-state, something in between a state and a mere alliance among states - a confederation in the broadest sense of the term. And the status of the ECU reflects in every way the hybrid and peculiar status of the EEC.
The member countries of the
TEREST Mathis. ": 38.
Common Market - and in particular the strongest of them, West Germany - did not want or dare to pool their exchange reserves, and so they have not created a real common currency. Each of the twelve countries retains its own national currency. From the outset, the ECU has only been a European accounting unit.
The European Monetary System does not abolish exchange rate fluctuations between the twelve member countries of the European Community, it simply limits the scale of these fluctuations to 2.25 per cent. And this limitation only applies to seven currencies: the German mark, the Netherlands guilder, the French franc, the Belgium-Luxemburg franc, the Italian lira, the Danish krone and the Irish pound. Moreover, Britain, Spain, Portugal and Greece are not part of the EMS. Exchange rate fluctuations in the framework of the EMS are just made a little more difficult, they are delayed. When the central banks have to over-buy national currencies and over-sell foreign currencies or gold to maintain the different parities between 2 and 2.25 per cent, they end up by facing facts and adjusting exchange rates, even inside the EMS. There have been 11 of these adjustments since the creation of the EMS in 1979, and a twelfth is expected this year.
The European Currency Unit is not yet a real currency. It is simply an average of the seven currencies. These remain true currencies to the extent that the states that issue them are real states, and that the competition between the capitalist classes that dominate these states remains real competition.
But it would be wrong to suppose that the ECU is condemned to remain a simple accounting unit. Today, some international loans are ITS ebilero. International Viewpoint 9 February 1987
issued in ECUs. This quasi-currency has already become a monetary instrument for the international movement of capital. Less stable than the German mark, the Swiss franc or the Netherlands guilder, it is more stable than the French franc, the Italian lira or the British pound sterling, and also more stable than the American and Canadian dollars. All categories of international capitalists therefore have an interest in seeing a diversification of the functions and uses of the ECU.
It is also in the interests of West German capitalists. Because if the ECU - as long as it is the average of seven currencies - is less stable than the strongest of them, the German mark, increased use of the ECU reduces pressure on the mark, so that it can fulfill an international function. This therefore reduces the risk of speculation in the mark, and equally that of a monetary crisis in West Germany.
This is why there is a tendency towards the strengthening of the European Monetary System, towards transforming the ECU from a quasicurrency into a true one. In order for this tendency to come to fruition, part of the exchange reserves of the seven member countries of the EMS, and of the countries that will join in the future, must be held in common. That would clarify the risk that would be run by the wealthiest countries, above all West Germany.
Increases in the balance of payments deficits of France and Italy - or in Britain tomorrow - would be partially cleared by the gold, dollars or yen that are presently the property of West Germany and the Netherlands.
The external indicators of the success of the ECU would be the volume of invoices for imports and exports of EMS member countries made out in ECUs and no longer in dollars or German marks, yen, pounds sterling, French francs and so on.
The present monetary crisis, of which the adjustments of exchange rates at the EMS meeting on January 12 this year were only the most recent manifestations, is generally attributed to the chronic instability of the dollar - in other words, the dollar's long-term decline in spite of spectacular resurgences such as the one in 1983-84. This is obviously not wrong.
More especially, January 1987's Rare-up on the exchange markets was caused by the fall of the dollar, encouraging currency speculators to buy massive quantities of German marks and Netherland guilders. The result was a rise in the rates of these currencies - not only in relation to the dollar, but also in relation to the French franc - and growing tensions inside the EMS.
The American economy has been hit by a profound structural weakness, due to the disappearance of its advantages not only in industrial but also agricultural productivity, where, for example, it faces competition from Argentinian wheat and Brazilian soya. The result is the chronic deficit of America's trade balance, currently in the order of 200,000 million dollars a year, and the growing foreign debt of the US, above all owed to Japan and capitalist Europe. We should remember that this debt surpasses that of the whole of the "third world" to the imperialist countries. (3) A vicious circle for the American economy
This US indebtedness can only be covered insofar as Japanese European debtors agree to hold it in the form of obligations, treasury certificates, deposits in American banks and so on, made out in dollars. They will only do this if the yield from these debts is higher than the yield of assets made out in German marks, Swiss francs, ECUs, yen and so on. This therefore requires a higher interest rate in the US than in Europe and Japan.
But such high interest rates favour parasitical investments in the US financial markets, speculation and the hoarding of capital to the detriment of productive investment. It therefore runs counter to increasing Us productivity, undermines the competitiveness of its industry and agriculture, and so increases the balance of trade deficit, that is, the need for foreign credits. Evidently, the American capitalist economy finds itself in a vicious circle.
Moreover, in order to fight the external trade deficit, the US bourgeoisie wants a lower dollar exchange rate. Since the beginning of 1986, the dollar's rate has gone down 40 per cent in relation to the German mark and the Japanese yen.
This has given a boost to US exports, but has barely reduced imports, encouraged monetary expansion and inflation, stimulated on the internal US market by the mushrooming of military spending and the enormous budget deficit that this has entailed. But, on the other hand, a lower dollar rate means a huge loss of capital for America's overseas creditors. This is why they are demanding as compensation that an insurance premium against the exchange risk be included in the interest rate yielded by the investments in dollars. Thus, they are demanding another rise in interest rates in the US. Again, the American capitalist economy seems trapped in the same vicious circle.
I have not even talked about the effects on the dollar of "third world" debt, and the debt of the private US economy - in total, 8,000,000 million dollars of debts made out in dollars! The risks of a crash are obvious.
But it would be an error to consider that the current monetary mess is simply the result of the dollar crisis and the "third world" debt. It also has its own sources in capitalist Europe and will have others in future in Japan.
The stability of the European Monetary System depends on the stability of its member countries. The law of the chain here is fully applicable: a chain is only as strong as its weakest link.
And weak links are not lacking in the EEC. Britain's industrial decline is the fundamental reason for Margaret Thatcher's hesitation in rejoining the European Monetary System. France and Italy still have actual or potential serious balance of trade deficits, to say nothing of their chronic and pronounced budget deficit. Spain has an unemployment rate of over 20 per cent. France is facing a new social crisis. And if West Germany and Japan appear to be in good health financially, the high rate of the mark and the yen risks becoming a factor of economic instability.
These two countries are dependent on exports. The rise in the exchange rates of their national currencies is a threat to their ability to export, and has already thrown Japan into a recession. This could rapidly become the case in West Germany.
disparity in the external and internal economic situations of the main imperialist powers belonging to the EMS, as well as in their social situations, is also one of the factors in international monetary instability. Underlying this we see the uneven and combined development of the various imperialist powers, that is, the sharpening of competition between them. This increased inter-imperialist competition, which also extends to the countries of the "third world" ', is fundamentally the result of the deepening of the long economic depression that is hitting the international capitalist economy as a whole.
3. See "The hey Ernest Mandel To infernal logic the debt crisis"