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Selling Globalization: The Myth of the Global Economy
Michael Veseth
Lynne Rienner Publishers, Inc.
1998
6. The Political Economy of Globalization
| Imagine a wondrous new machine, strong and supple, a machine that reaps as it destroys. It is huge and mobile, something like the machines of modern agriculture, but vastly more complicated and powerful. Think of this awesome machine running over open terrain and ignoring familiar boundaries. It plows across fields and fencerows with a fierce momentum that is exhilarating to behold and also frightening. As it goes, the machine throws off enormous mows of wealth and bounty while it leaves behind great furrows of wreckage. |
| Now imagine that there are skillful hands on board, but no one is at the wheel. In fact, this machine has no wheel nor any internal governor to control the speed and direction. It is sustained by its own forward motion, guided mainly by its own appetites. And it is accelerating. |
| —William Greider 1 |
If the process of globalization is as incomplete and self-limiting as I have suggested, then why does the idea of globalization enjoy such wide acceptance? Why isn’t it subjected to sterner logical tests, more thorough empirical analysis, and critical public debate? The answer is that there are many interests that are served by the image of globalization or that would be threatened by its more critical consideration. I already suggested in Chapter 2 that globalization has become a profit center for management consultants. But whereas management theories are fads that appear and disappear, the popular idea of globalization persists. It persists, in part, because there are larger interests served by the image of globalization as the headless horseman of international capitalism.
Globalization is a lever that special interests can use to pry open certain public policy doors that would otherwise be tightly shut. It provides a convenient reason for fundamental institutional change, or perhaps an excuse for it, in a world in which fundamental institutional change is slow and painful and the policies that promote it are controversial and unpopular.
The main body of this chapter is a case study of a critically important political use of globalization: the movement toward a single currency in Europe. The conventional wisdom is that a single currency is an economic necessity if Europe is to be a competitive force in the world economy, but that solving the economic problem of globalization also solves some high politics and low politics problems in the European Union (EU). In this interpretation, a single currency is, conveniently, an uncomfortable economic necessity and a comforting political windfall. In reality, I argue, a single currency makes very little economic sense for Europe—the globalization-based economic argument is fatally flawed—but the chaos that a single currency will create will force Europe to make social and labor policy reforms that would otherwise be impossible.
The single currency will force Europe to reform its welfare state and to renegotiate the social contracts on which it is based. The threat or promise of globalization, in other words, is the lever that opens up the possibility of seemingly impossible domestic policy reforms.
Globalization has its uses. These uses require and promote exaggerated images of globalization that conflict sharply with actual globalization. The consequences of the political responses to globalization may in some cases be more revolutionary and important than the actual economic processes that motivated them.
A powerful example of the political use of globalization is found in William Greider’s 1997 book One World, Ready or Not: The Manic Logic of Global Capitalism. Greider seeks to mobilize what we used to call the left to oppose the seemingly invincible forces of the right in this post–Cold War era. Nothing unites an otherwise uncooperative group so forcefully as a common enemy, and Greider finds in globalization just the enemy he needs: one that is amoral, apolitical, and powerful beyond imagination.
Globalization and the Politics of Class Struggle
If Lenin had entered a time machine in 1907 and arrived 90 years in the future, One World, Ready or Not is the book that he would have written. Greider’s arguments are the same ones that Lenin used in his Imperialism: The Highest Stage of Capitalism, although Greider’s are updated and improved and stated more effectively, based on the journalist’s nose for a story instead of the theorist’s sharp eye for statistical evidence.
What Greider seems to want to do is nothing short of organizing a global labor movement. He wants to reverse the declining influence of labor unions in advanced industrial economies, to end the competition and squabbling among national labor groups, and to forge a global labor movement that can stand up to and resist the inhuman, runamuck global capitalist machine. You can almost hear the call, Workers of the world, unite!
Greider frames the issue in terms of power, a key element in any political analysis. The process of economic globalization is complicated and abstract, he says, and hard to understand. But don’t worry, because it can be simplified: It is all about capital and labor.
The multinational corporations are, collectively, the muscle and brains of this new system, the engineers who are designing the brilliant networks of new relationships. It is their success at globalization that has inevitably weakened labor and degraded the control of governments.... Despite their supple strengths the great multinationals are, one by one, unsure themselves. Even the most muscular industrial giants are quite vulnerable if they fail to adapt to the imperatives of reducing costs and improving rates of return.... Behind corporate facades, the anxiety is genuine.
The Robespierre of this revolution is finance capital. Its principles are transparent and pure: maximizing the return on capital without regard for national identity or political and social consequences. 2
The multinational corporations here play a role familiar to students of Marx. They are the bourgeoisie, the class that possesses the weapons of capitalist power. They train these weapons first on workers, but cannot stop themselves inevitably from turning them on each other. Finance capital was the villain in Lenin’s Imperialism. Finance capital extended the battle beyond Europe to the exploitation of labor around the world. Greider states:
The fundamental struggle, then as now, is between capital and labor. That struggle is always about control of the workplace and how the returns of the enterprise shall be divided. In both dimensions, capital is winning big over employees, just as it did in Marx’s time. The inequalities of wealth and power that Marx decried are marching wider almost everywhere in the world. The imbalances of power lead today to similar excesses and social abuses. 3
Greider writes so well and so cleverly that his open statement of the Marxian theme in no way weakens the book or even lessens its appeal among some readers who are also corporate shareholders and vote Republican. He reports true stories of human suffering and labor abuse from around the world. Labor is powerless to resist because, first, power is concentrated in the hands of finance capital and, second and more important, labor is unorganized globally and so is structurally incapable of opposing global capitalism. Finance capital plays the interests of different national unions against each other, weakening union power everywhere. In Greider’s view, globalization is a powerful threat to human society. Labor must organize to oppose it, or the revolution will run its destructive path.
There is much to both admire and criticize in Greider’s work, but what I appreciate the most is the great paradox of the collapse of communism that he proposes. The collapse of Soviet-style communism, which was an attempt to apply Marxist/Leninist ideas, has actually contributed to the process of economic globalization, which he tells us has unleashed the harsh competitive forces that Marx and Lenin saw so clearly a few generations ago. The collapse of communist states and the ongoing accelerating globalization create a reason for—indeed the necessity of—the emergence of a reinvigorated Marxist/Leninist program today.
The Political Uses of the Globalization Myth
The political use of globalization is especially popular today, but it is not a new phenomenon. Norman Angell in The Great Illusion (1911) argued that the global markets that people like Keynes also saw had become supremely powerful, much more powerful than states. 4 Economic interdependence, strengthened by technological change and scientific advances, made the nations of the world so interdependent, especially in terms of finance, that sovereignty was an obsolete concept. 5
Angell predicted that governments would be so powerless, and market forces so pervasive, as to make war unprofitable and therefore impossible (a premature obituary for the nation-state if ever there was one, since World War I began just months later). Global market logic would be the one logic of the world, and the sooner governments became connected (or got out of the way), the better it would be for them. Angell’s project was to use the promise and threat of globalization to change politics, to get governments out of the business of making war. He failed, alas, because the reality of globalization in 1911 was not as strong as the reality of international political conflict.
Peter Drucker makes a similar globalization case today, but with a different purpose. Globalization today occurs within the context of the Keynesian revolution in macroeconomic policy and what might be called the Beveridge revolution in social policy. 6 There is much more government to deal with now, in this age of macropolicy and the welfare state. Much of the focus of government policy has been on the development of institutions to manage domestic problems, especially problems of economic and social instability. Even during the leaner post–Reagan/Thatcher years, these domestic institutions remained strong and the persistent focus of policy.
Drucker argues that globalization has made these institutions of domestic policy irrelevant, redundant, or at least inappropriate: “For developed economies, the distinction between the domestic and international economy has ceased to be a reality, however much political, cultural, or psychological strength remains in the idea. An unambiguous lesson of the last forty years is that increased participation in the world economy has become the key to domestic growth and prosperity.” 7 Inward-focused domestic institutions miss the point. New institutions and new policies are needed.
The world economy has become too important for a country not to have a world-economy policy.... What is needed is a deliberate and active—indeed, aggressive—policy that gives the demand, opportunities and dynamic of the external economy priority over the domestic policy demand and problems. For the United States and a number of other countries, it means abandoning ways of thinking that have dominated American economics, perhaps since 1933, and certainly since 1945. We still see the demands and opportunities of the world economy as externalities. We usually do not ask whether domestic decisions will hurt American competitiveness, participation and standing in the world economy. The reverse must become the rule: will a proposed domestic move advance American competitiveness and participation in the world economy? The answer to this question determines what are the right domestic economic policy and business decisions. The lessons of the last 40 years teach us that integration is the only basis for an international trade policy that can work, the only way to rapidly revive a domestic economy in turbulence and chronic recessions. 8
Unlike those who argue simple-mindedly that the nation-state is dead, Drucker sees it as a strong force with a clear purpose, but shackled by old ideas and old institutions. Globalization has rendered the institutions of the Keynesian and Beveridge revolutions irrelevant. Globalization is the reason nation-states must fundamentally reform their domestic institutions. Economic globalization creates the necessity of political change. It is, as I said before, the same idea that Angell argued, but Drucker aims at domestic change, not international conflict resolution.
Susan Strange draws somewhat the same conclusions from her analysis of international bargaining. Diplomacy, she writes, used to be a state-to-state matter. Globalization, however, has created new actors that must be accounted for in international relations. Global firms, no longer firmly anchored to a particular home country market, have power comparable in some cases to that of nation-states. “Our research suggests that the crucial difference between states these days is not, as the political scientists used to think, between ‘strong’ states and ‘weak’ ones, but between the sleepy and the shrewd. States today have to be alert, adaptable to external change, quick to note what other states are up to. The name of the game, for governments just as for firms, is competition.” 9 Diplomacy is now a three-way bargain: state-to-state, firm-to-firm, and state-to-firm. 10
Globalization has clearly created an environment in which firms bargain with states, states compete with states, and specific government policies change in response to these competitive forces. The process of competition for major new industrial plants, such as the BMW factory that eventually located in South Carolina and the Mercedes-Benz factory that was eventually built in Alabama, epitomizes the changing nature of state-market interaction. The reality of globalization creates the politics of competition, but a type of competition that Angell would find appealing—multilevel competition to create the most appealing environment for the peaceful forces of globalized interdependence.
Drucker and Strange describe a process that Wolfgang Streek calls “international regime competition.” 11 This is the idea that the process of globalization forces national macrowelfare regimes to either compete with (in Drucker’s framework) or bargain with (in Strange’s framework) each other. The result is that internal competition forces domestic political, social, and economic change—the sort of fundamental institutional change with which we are concerned here. This is a powerful and important political use of globalization.
The Political and Economic Logics of European Integration
Perhaps the most important current case study of international regime competition driven by the political use of globalization is in the EU. The movement toward monetary union and a single currency is likely to produce international regime competition that will make the BMW and Mercedes-Benz cases seem, in retrospect, to be small potatoes.
There is perhaps no better example of the political use of economic forces than the EU. From day one, the process of integration in Europe has relied on the strategy of using economic benefits to compensate for political costs. In what I have called the great “science project” of the second half of the twentieth century, Europe is an experiment to test the hypothesis that economic unification and prosperity can produce political unification and security.
But, as I argue later, the changing environment in which European integration is taking place has created a political crisis—a crisis that can be resolved only through international regime competition. Globalization, in the form of the need of monetary union in Europe, has become the lever by which Europe is compelled to address a set of national and supranational problems that would be politically taboo without the dead hand of Greider’s destructive global machine to force the issue
In his recent book, An Imperfect Union: The Maastricht Treaty and the New Politics of European Integration, Michael J. Braun writes that European relations have been conditioned by
the two primary logics of European integration, both of which have been in operation since the late 1940s. The first of these is the logic of interdependence and economic necessity. In general terms, integration has been necessary to enable relatively small European countries to survive and compete in an increasingly interdependent world economy dominated by large-market economies such as the United States and Japan. Furthermore, integration has enhanced the joint and individual capacities of European states to manage interdependence, the consequences of which—economic instability, environmental destruction, social uncertainty—are beyond the power of even larger national governments to control. In this manner, the sacrifice of some authority and policy independence to the European institutions has enabled national governments to better perform the economic and social tasks required of democratic welfare states and has thereby actually bolstered, rather than undermined, the sovereignty and legitimacy of European nation-states. 12
This is a classic globalization argument. By expanding individual market economies into a larger integrated economy, Braun argues, European nations have achieved greater wealth, greater stability, improved economic security, and even perhaps greater legitimacy.
The second logic is political. An economically integrated Europe is more secure from both the external threat of Cold War aggression and the threat of internal political divisions that produced two world wars in a single generation. By intensifying economic interdependence, the logic goes, integration also intensifies political interdependence.
It is probably fair to say that economic means have been easier to achieve than political ends in the process of European integration. This is true in both of the “dimensions” of integration: broadening and deepening. Broadening the membership of the EU, from the original six to the fifteen EU members of 1998, has at each stage expanded the market and stimulated the collective economy, which has compensated for the difficult political choices that were necessary and the many side deals that were struck. Market deepening, especially in the form of the 1992 single market initiative, has acted to increase economic interdependence and expand the domain of collective political choice.
The problem with this, according to many observers, is that the process of European integration seems to work more like a bicycle than a train. If it were a train, the economic benefits would produce lasting political momentum. It behaves more like a bicycle, however. When economic integration stops, there is no political momentum to draw on and the process of political integration collapses. Like riding a bicycle, when you stop pedaling, you fall over.
The economic logic of European integration through free trade has been weakened by the increase in global free trade. European nations today want their economies to be part of an integrated global market structure for all the same reasons they wanted to be part of an integrated regional trade structure before.
At the same time, however, the end of the Cold War, which produced German unification and expanded relations with formerly communist nations, has created an environment that magnifies the political divisions among EU states. The eastward broadening of the EU early in the twenty-first century will likely make this problem even worse. Eastward expansion will create greater political difficulties for the states that are already EU members as their influence in EU-wide policies is further diluted. And the political cost of lost sovereignty will not this time be offset by economic gains. Careful eastward expansion of the EU will be costly. It will not be as costly as German unification, of course, because it will not be as sudden nor will it take place on the same generous terms. And it will benefit the economies of Poland, Hungary, the Czech Republic, and the other nations that eventually join the EU. But there will be costs that the present EU members will be forced to pay. 13
A prosperous, economically vibrant European Union could well afford to pay the costs of eastward expansion, which have been estimated at perhaps one tenth of one percent of the EU gross domestic product. 14 But these terms do not describe Europe in the 1990s. European economic growth has been notoriously slow, and its unemployment rates in 1997 scandalously high: Spain, 21.8 percent; Belgium, 13.1 percent; France, 12.8 percent; Italy, 11.9 percent; and Germany, 11.2 percent. Only Britain and the Netherlands have unemployment rates within one percentage point of the United States. 15 Under these circumstances, it is understandable that many EU nations might see costly coordinated eastward expansion as less desirable than simple individual globalization initiatives. I don’t think it would take much political or economic pressure to make the wheels fall off Europe’s bicycle.
It is hard to imagine what could hold Europe together in this environment, especially given that forty years of cooperation on economic and political issues seem not to have produced any sort of truly pan-European political consensus or set of common values. Europe is a single market, granted, but only a single market, not a single nation or a single people or a single idea.
However, I believe that globalization, both as threat and as an opportunity, has and will serve the purpose of European unification brilliantly. The prospect of economic globalization has produced in Europe a political environment within which it may be possible for nations to address economic issues that were previously taboo politically, and so to enact the fundamental institutional changes that are now necessary. Just as Greider uses globalization to promote the political agenda of a global labor movement, the EU is using globalization to create a political environment in which labor market reform can occur.
Globalization, Europe, and Monetary Union
It is necessary at this point to consider how monetary union fits into Europe’s dual logics. This section presents the conventional wisdom, which I consider to be incomplete. It holds that the Maastricht Treaty and the general framework of monetary union in Europe is driven by a combination of high politics and low politics and, as in the past, uses economic tools to achieve its goals.
High politics is thought to be the most important. The post–Cold War era has produced a reincarnated German Problem. Reunited Germany is the five-hundred-pound gorilla in Europe, with tremendous power and strong will. The German Problem is how to keep Germany part of Europe without dominating Europe and, hence, how to keep Europe peaceful and secure.
Monetary union accomplishes this goal, the argument goes, because these policies represent a German commitment to Europe. Germany agrees to cede sovereignty, showing its good faith, and, further, binds itself to Europe irrevocably through its adoption of a single European currency. But what is to keep Germany from dominating Europe under these circumstances? The high-politics answer is France. Using a single currency to bind Germany to Europe also binds Germany to France. A unified Europe, centered on a Franco-Germany alliance, is seen as the solution to the new German Problem. Monetary union, which leads directly or indirectly to political union, is the economic key that makes the solution possible.
According to the conventional wisdom, resolving the high politics of the German Problem has the further benefit of dealing effectively with the dangers of globalization. The global expansion of economic activity poses a high-politics threat in the form of either powerful trade blocs (Japan and Asia; the United States and the Americas), powerful multinational corporations, or international market forces that endanger Europe’s security. One way or another, globalization creates economics risks and is therefore a threat to national security against which individual nations are powerless. A regionally integrated economic union, with a single currency and therefore a single economic policy, however, can more effectively confront this threat. Monetary union is the economic equivalent of NATO (the North Atlantic Treaty Organization); it is the best collective defense against globalization’s economic risks.
Low politics is money politics—the politics of how to cut the pie. In Europe it is especially the politics of budget deficits, inflation rates, and the special interests that are aligned on the different sides of these issues and that must be balanced through them. European governments have uneven track records in the low politics of balancing the public’s interest in balanced budgets and price stability with special interests, whose actions tend to destroy budgets and produce inflation. The solution to this low-politics problem, some believe, is a sort of binding agreement that would, for example, prevent France from acting as France has in the past and force it to act more like Germany. That is, France and Italy and other European nations need an external constraint that would prevent them from caving in to domestic special interests on matters like this and would therefore force them to honor the broader public interest.
According to the conventional wisdom, monetary union accomplishes this goal in two stages. First, to qualify for monetary union, nations must bring inflation rates, budget deficits, and public debts down to a specified level. This is intended to force national governments to deal with special interests. In fact, the external constraints of the Maastricht criteria have been remarkably successful in changing the dynamics of budget making in Europe, even if the actual numerical targets have not been met in many cases.
Second, a single currency, the euro, replaces national currencies, taking money creation choices out of the hands of national governments. Money and inflation would be the responsibility of the European central bank, modeled on and influenced by the German Bundesbank. Monetary union thus solves the low-politics problems of inflation in the long run.
High politics is the strongest motivation for monetary union among the richer nations, according to the standard interpretation of the Maastricht negotiations, whereas low politics dominates the interests of the poorer nations. 16 In simple terms, Germany is bound to France in matters of high politics, and Spain, Italy, and others are bound to Germany on the low side.
As I noted earlier, the conventional economic argument for monetary union is basically a globalization argument. National currencies and the instability of their rates, the argument goes, create transaction costs and foreign exchange risks that reduce the efficiency of expanding global markets and discourage investment in Europe. Europe must enter into monetary union if it wants to participate fully in the globalization process. Its participation is necessary, as well, to have any hope of controlling or influencing global market forces.
Without monetary union, Europe would risk globalization sweeping over it (the issue of control) or perhaps bypassing it (the stability argument). With a single currency, Europe would be in a position to both participate in economic globalization and control or influence its path. Monetary union is thus a version of the argument that “We didn’t really want to have to do this (i.e., give up national currencies, monetary autonomy, and fiscal independence), but the devil (globalization) made us do it.”
The economic argument for monetary union is actually better than it seems and better than its proponents suppose. True globalization is unlikely, and as long as financial instability and exchange rate chaos persist, national markets will remain delinked in important ways. The one clear way to eliminate this instability, however, is precisely to eliminate exchange rates by eliminating national currencies. The pooling of reserves that would accompany the creation of a European central bank would also reduce exchange rate instability by discouraging speculative attacks.
Although the threat of globalization is an accepted reason for the invention of a single currency, in fact the single currency is probably necessary for the “globalization” of Europe (to use this term in an awkward way). Thus globalization is not only the proclaimed reason for monetary union but also its possible incomplete effect. 17
The Economic Illogic of Monetary Union
Using the threat of globalization to drive monetary union makes some economic sense, as we have just seen, and is very useful in producing certain high and low political outcomes. But the dirty little secret of monetary union is that its most important economic and political effects are seldom part of the public debate. Standard economic theory predicts that monetary union will actually exacerbate Europe’s main economic problem—structural unemployment—while it removes many of the tools that nations currently rely on to reduce unemployment’s negative effects. Monetary union, I argue, will create an environment in which it will be absolutely necessary for European governments to reform their previously untouchable welfare and labor market policies. In this line of argument, then, monetary union is the use of globalization to force social reforms and labor market liberalization in nations with strong political interests opposing these actions. This argument is based on what is called the economic theory of the optimal currency area. This theory addresses the obviously relevant question of the conditions under which it makes sense for different nations or regions to have the same currency versus the situations under which separate currencies are more efficient. 18
The role of exchange rates in this analytical framework is to help regions or nations deal with the adjustment problems that come from asymmetrical shocks or uneven growth rates. When economic activity is uneven, creating pockets of unemployment and persistent payments problems, adjustments can occur either through external exchange rate changes or through internal effects such as wage and price changes. The depressed region might, for example, experience a currency depreciation that would make its products more competitive and help resolve its payments problems. Or it could experience wage and price deflation that would also improve its international competitiveness, albeit at potentially severe social costs.
Generally, if exchange rates are flexible, internal adjustments are less important and need be less severe. If exchange rates are rigid, then internal adjustment must bear more of the burden. Two extreme cases illustrate the important concepts of the optimal currency area model.
First, consider the case of a set of countries or regions that can operate efficiently with one currency. Assume that two nations have the following properties: They generally experience the same sorts of macroeconomic “shocks” that create unemployment cycles and similar rates of economic growth; they have flexible labor markets, with high degrees of labor mobility and flexible wage mechanisms; and they have strong systems of fiscal equalization, to transfer funds from expanding regions to those that suffer recession. Under these circumstances, the theory argues, a single currency makes sense. Asymmetrical shocks will be uncommon, and when they occur, internal market forces and fiscal transfers will efficiently dampen them.
If an unemployment shock were to hit one region harder than the other, for example, the combination of labor mobility between regions, wage flexibility, and fiscal transfers would tend to moderate the impact and prevent serious internal dislocations. In short, the costs of internal adjustment through wages, prices, and fiscal transfers would be small relative to the benefits. This would be an “optimal” single currency area. It is argued that the United States looks something (but not exactly) like the case just described, so that the costs of a single national currency (versus a number of regional currency units) are less than the benefits of a dollar zone.
Now suppose an opposite extreme. Imagine two countries that are affected differently by macroeconomic shocks. Asymmetrical shocks or uneven rates of economic growth leave unemployment persistently high in one region and low in the other and create long-term payment imbalances between them. Suppose that labor mobility is low, wages are inflexible, and the system of fiscal transfers is not well developed. Under these circumstances, a single currency system produces persistent unemployment in hard-hit regions and persistent payments problems between regions. Under a flexible exchange rate system, these problems would not exist (or would not exist in the same persistent and serious way), since the hard-hit nation’s currency would fall in value, stimulating its net exports and thus moderating both the unemployment and the payments problems.
With a single currency (or permanently fixed exchange rates, which is the same thing), the adjustment costs will be very high and will take a long time. Without flexible exchange rates to absorb the asymmetrical shocks, the adjustment must take place the hard way—through the deflationary effects of long recession and persistent unemployment. The only alternative, within the context of a single currency, is a program of radical internal changes in labor markets, social programs, and fiscal institution. Wage flexibility, labor mobility, and inter-regional fiscal transfers are required to replace exchange rates as tools to balance payments.
The point of this analysis is, of course, that the EU nations are not very good candidates for a single currency in terms of the logic of optimal currency areas. The economic structures of the different nations of Europe are different enough to make perfectly symmetrical macroeconomic shocks unlikely. Unemployment shocks are more likely to be strongly asymmetrical, therefore producing significant payments and unemployment imbalances. European labor markets, with exceptions to be noted later, are notoriously rigid, with high wages and long-term unemployment supported by generous and expensive welfare state systems. The system of regional transfers within the EU is inadequate to deal with these adjustment problems. 19
No one would seriously propose a single European currency on the basis of the economic logic of the optimal currency area theory. The much-touted Maastricht convergence criteria actually exacerbate the adjustment problem. To qualify automatically for monetary union, nations are required to satisfy the following conditions:
In addition, nations must essentially commit themselves to maintaining these economic margins in the long run.
As viewed by the conventional analysis, these Maastricht convergence criteria make monetary union with low inflation possible, thus achieving the low politics goal of the exercise. Viewed from the perspective on the optimal currency area analysis, however, the Maastricht criteria actually disable the monetary and fiscal policy levers that an individual nation might otherwise use to deal with unemployment and growth problems in the usual “Keynesian” way. Under a single currency, with exchange rates fixed and monetary and fiscal policies inflexible, the only way to address growth and unemployment problems is to attack the national policies that prevent them from being solved through wage, price, and resource movements.
In other words, the only way to solve the problems that are sure to grow worse in the post-Maastricht environment is to break the European social contract with labor and liberalize the welfare state. Thus monetary union is the road to a great political confrontation. As Eichengreen and Frieden have written,
If it is true that shocks to European countries are more asymmetrically distributed than shocks to U.S. regions, while both labor mobility and real wage flexibility are lower in Europe, then the costs of monetary union will be higher than in the U.S....
Uncertainty about the empirical magnitude of every one of these benefits and costs suggests the absence of a clear economic case in favor of EMU [European monetary unification]. Given the risks and uncertainties that pervade the process, there would have to be a clear margin of benefits over costs for economic considerations, narrowly defined, to provide a justification for such radical departure in policy. The absence of such a margin implies that the momentum for monetary union must therefore derive from other, primarily political, factors. 20
It is to these political factors that we now turn.
The Political Uses of Monetary Unification
The conventional interpretations and public discussion of monetary union seem to miss the link between a single currency and labor market problems. For example, the usually astute Martin Wolf of the Financial Times reported in the run-up to the French elections of 1997 that “European political leaders have repeatedly stated how important they think [monetary union] is; they have all, including the French, already imposed almost all the sacrifices necessary to fulfill the Maastricht treaty’s economic convergence criteria; and the pain consequent upon that austerity lies largely in the past.” 21
This comment entirely misses the point that some very significant costs will follow monetary union. If it was necessary to eliminate inflation before a single currency, it will surely be necessary to eliminate the most important labor market rigidities after it. Of the two problems—inflation and labor market rigidities—the labor market probably presents the greater political challenge, because these issues cut so deeply into the social contract on which many European political systems are based.
My interpretation of EMU is that it will create an economic environment in which labor market reform must take place as well as a political environment in which reform is possible because of the powerful imagery of globalization. Whatever Europe does to free its labor markets, and however unpopular those policies are, these actions will always be considered better than the alternative—the headless demons of unrestrained global capitalism. This threatening image of globalization is useful politically and is, I think, also necessary, since labor market rigidities have created for Europe an economic problem that seems to defy normal political solutions for many of the countries involved.
Wolfgang Streek argues that the forces of globalization, in the form of the problems of monetary union, create a competitive environment for national policies, and that this competition results in labor market and social policy reforms. He writes that the effect of international regime competition in this case will be “diverse and subtle”:
Streek’s interpretation of the competitive political effects of monetary union is persuasive. This competitive model assumes that there is no consensus on pan-European social policy that could help the EU resist what labor leaders must surely consider to be “destructive” competition.
Indeed, attempts to create EU social policy have not been notably successful. Although supranational social policy has always been on the European agenda, it has seldom been considered seriously. The practice has generally been to leave social policy issues to national governments. Early attempts at a European social policy resulted in only relatively weak statements of labor rights. Jacques Delors in 1988 proposed the addition of “social dimension” to the single market, but without success. Streek writes that
Devoid of potent political allies and swimming against the current of the neoliberal Zeitgeist, the Delors Commission counted on the process of market integration itself to give rise to tensions and conflicts that would demonstrate to national governments that successful completion of the process required a rebuilding of Community institutions and policies from a regime geared to market making into one capable of market correction. 23
So Delors thought that the fear of globalization would allow Europe to strengthen its labor policies and welfare states. Tensions and conflicts surely have appeared, but ironically, according to Streek, they may be resolved through competition that “unbuilds” rigid social institutions in response to globalization’s promises and threats.
European nations also are likely to face considerable external pressure to adopt reforms that make domestic labor market adjustments both possible and efficient. Absent these internal reforms, the EU and the euro will be like a bull in a china shop: powerful, but unpredictable. The single currency could represent a danger to the international financial system. Toyoo Gyohten, for example, has written on Japan’s concerns about this matter. On one hand, he argues, the single currency will create opportunities for Japanese firms that do business with and in Europe because of lower transactions costs and increased efficiency. But
There will be no central fiscal authority with a substantial role in taxing or spending—so no member country can receive a fiscal transfer in a recession to stimulate a slack economy. Member countries are also required to cut government deficits under the growth and stability pact.
Some Japanese business executives argue there is a danger that economic or political instability will emerge, and that the single currency may not work well in practice.
Theoretically, the movement of labour and wage flexibility across borders will eventually solve economic disequilibrium between members of the monetary union. However, there is as yet little movement of labour, as people are discouraged to shift between countries by language and cultural barriers.
Although there is no doubt the euro can be introduced given the strong political will among EU leaders, it is not clear that monetary union can be maintained with stability. 24
Toyoo Gyohten has written that he is confident that Europe can resolve these problems. I think this confidence is well placed. International regime competition within the EU will be supplemented by international pressures from the United States, Japan, and other nations that have much to lose if the single currency experiment becomes dangerously unstable. And there is a third force to consider—the force of domestic politics. The single currency will magnify domestic problems for some countries, and I think that these states are still powerful enough, despite what globalization theorists say, to be able to take effective action to reduce these problems. Since they will be unable to fight high unemployment and economic stagnation problems with international exchange rate tools or domestic macroeconomics tools, they will use the domestic microeconomic tools that remain.
Monetary union will put the domestic politics of European nations under stress that will be most severe for those nations with the highest unemployment. They will find themselves with only one option—labor market and social welfare reforms—to solve what are likely to become increasingly disruptive social problems. Even without international regime competition, I believe, these reforms will occur.
This conclusion is based on a famous result of international monetary economics called the Mundell-Fleming theorem. 25 Mundell-Fleming considers that national governments have three main international economic objectives: exchange rate stability, capital mobility, and monetary policy autonomy. But these objectives are mutually inconsistent. It is impossible, according to Mundell-Fleming, to have all three at once. A nation can have fixed exchange rates and monetary policy autonomy, but this requires capital controls, which limit capital mobility (an aspect of the Bretton Woods system). Or a nation can have monetary policy autonomy and capital mobility, as the United States did, especially during the 1980s, but will have to live with unstable exchange rates.
Or, to come to the point, nations can make the European monetary union bargain, which is also a bit of a trap. They can have fixed exchange rates (single currency) under a regime of capital mobility (provided by the Maastricht Treaty), but they will have to give up their ability to use monetary policy to address domestic economic issues such as unemployment. The European nations, by agreeing to tight budget standards, also have effectively given up the right to use fiscal policy. In effect, I argue, there are no macroeconomic tools left with which national governments can address unemployment problems. The only tools that remain are microeconomic ones—labor market policies.
The Economist does not entirely agree with this analysis. They see the Mundell-Fleming trap but doubt that either internal social distress or external competitive forces will be sufficient to change Europe’s political course in the short run. They write that
Largely because of the political difficulties, the chances are that Europe’s chronic unemployment will drift on for some time, further damaging the lives of the continent’s least fortunate citizens. How long this continues depends partly upon whether monetary union happens, and what its effects will be. The single currency would change Europe’s labour markets because it would make it harder for governments to adjust macroeconomic policies to suit circumstances in their own economies. Instead, most of the burden of adjustment would fall on the labour market. So, when change comes, if it comes, it may not be gentle at all. And if Europe’s labour market comes crashing down, the ideal of consensus will probably topple with it. 26
Policy reforms that make European labor markets less rigid and that increase the prospects of labor mobility solve the optimal currency area problem and also provide an escape from the Mundell-Fleming trap. I think that the single currency nations will have no choice in this matter, with or without international regime competition and pressures from the United States and Japan, although competitive forces and external pressures would make national adjustment more imperative and thus speed up the process.
The Political Economy of Labor Market Reforms
Like all good European policies, monetary union moves ahead not because it appeals to any common European spirit but because it serves different political and economic interests for different nations and national leaders. In France, for example, monetary union provides a reason or an excuse (or an imperative) to reverse a long-standing bias against market forces—a bias that goes back at least as far as Colbert.
Even in the postwar era, France has tried to steer a middle road, with more “organization” and high-level bargaining than many other countries. This reflects a fundamental distrust of the market as much, I think, as an elevated opinion of technocracy. Former prime minister Edouard Balladur expressed this as “What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature.” 27 The Economist stated that
Whatever politicians promise publicly about unemployment, to do away with such legislation would endanger their chances of re-election. The unemployed are (thankfully) in a minority and are poorly organized. Those in work are more numerous and they are often organized in unions, which have a powerful voice in the political debate. Politicians know that the voters whose voices will carry the most weight are precisely those who stand to lose from any reform. 28
Recent policies of deregulation and market liberalization in France have pointedly bypassed labor market institutions. A recent study of economic growth in France during the postwar era concluded that
Despite several waves of liberalization, most active after the creation of the EEC and the return of the franc to convertibility, both in 1958, and then in the 1980s, France still appears to be struggling with lingering powerful rigidities. This is most evident when one considers the rate of unemployment, which has remained stuck at very high levels for a decade. In our view, labor market institutions and the process of human capital accumulation play an important role in these rigidities and may be a source of slower growth, much as protection and inefficient productive capital accumulation were in the 1950s. 29
For France, the road to monetary union is necessarily the road to labor market reform. The French governments and the French people have become accustomed to adopting otherwise unpalatable policies for the good of “Europe,” and monetary union will be another case in which this kind of sacrifice will be made. A single currency is the way to tie Germany to France and to Europe in a globalizing economy, the logic goes, and to keep Germany from dominating the scene. But the French will find that their labor market rigidities threaten to tear the single currency to bits. They will have little choice but to accept market liberalization in this political environment.
Ironically, France’s special mission to “civilize” both the market and European relations will force it to embrace the “law of the jungle” for labor relations.
Germany’s political interest in monetary union is different from France’s, of course. Prior to unification, Germany might have been seen as clearly benefiting from a single currency. In the optimal currency area scenario, Germany’s economy might have been the one less hard hit by asymmetrical shocks. With flexible exchange rates, an asymmetrical shock would cause, say, the franc to depreciate and the deutschmark to appreciate, spreading a bit of France’s recession to German workers. With a single currency, however, France’s recession would be France’s alone, assuming that wages, prices, and labor mobility are unchanged, and German prosperity would be preserved.
This happy situation ended abruptly with unification. Suddenly, Germany itself was a “currency area” with problems of its own. It can be argued that, at least for now, unified Germany itself does not meet the requirements for a common currency—that the conversion of ostmarks to deutschmarks was as economically unwise as it was politically necessary. Given the vast differences between the eastern and western economies, a flexible exchange rate would have been desirable, at least for a period, to ease the transition problems that are otherwise exacerbated by labor immobility, inflexible wages, and incomplete systems of fiscal equalization.
Suddenly, Germany needed an excuse to revise its domestic labor market organization. This system worked well enough before unification, but created severe problems afterward:
Germany is characterized by a dense network of unions, work councils, employers and other business associations which is embedded within a framework that promotes the continuity of economic structures and relationships.... It has been suggested that, in a set of core industries in Germany, this structure has proved responsive to the demands of increased competition in the product market. For other industries, the model fails to generate rapid adaptation because of a stalemate between the stakeholders as to the appropriate strategy. An effective form of government intervention to promote adjustment has not been developed....
Germany’s institutional rigidities of employment protection, highly structured wage setting and compulsory consultation by management with the workforce ruled out adaptation through cost-cutting strategies, and forced companies to move into high-value-added products and processes.
... The regions of East Germany are obliged to operate under the labour market and other forms of regulation transferred from West Germany and will not have the option of being a low-wage economy (cf. the Czech Republic). If they are to develop an indigenous economic base and enterprises are not to remain as the “extended workbenches” of West German companies, then the institutional structure must be created in which the long-term relationships that seem essential to West Germany’s high-wage economy can be built up.... Without these features of a coordinated market economy, East Germany will have little chance of succeeding in the kinds of market that successful West German firms moved into in the 1980s. The danger for East Germany is of having only the constraints entailed by German labour and corporate law, and few of the positive externalities associated with that system in the West. 30
The right reason to undertake these reforms is to deal with the extended costs of unification, which are worsened and prolonged by labor market policies. But, as The Economist notes, this is a politically unacceptable package in Germany, where those in the West already feel that they have paid too much for unification:
Faced with the highest unemployment for decades, Chancellor Kohl’s coalition has retreated down blind alleys that raise costs rather than lower them: unemployment can be dealt with, it has suggested, by job-sharing, limits on the working week, even by restricting overtime. It has been a pitifully inadequate response. But it reflects government’s priorities. Rulers have invested so much political capital in the unpopular fiscal measures required for Europe’s single currency that they have had nothing left over for jobs. 31
But monetary union is a different matter. It is external rather than internal and can be sold as being distinctly in Germany’s long-term economic interests. If labor market restructuring is the price of monetary union, then perhaps Germans can bear it.
When monetary union comes into effect, it will mean that local economic slow-downs can no longer be dealt with by local monetary policies and only in a limited way by local fiscal measures. The brunt will be borne by the labour market—which, if it is not flexible enough, will mean by unemployment. If governments are to avoid the potentially disastrous consequences of that, they need to start their reforms now—when the social model still stands a chance of being preserved. 32
Monetary union, made necessary by the threat of globalization and possible by the high and low political logics discussed earlier, will thus crack tough political nuts for both France and Germany, who therefore support it wholeheartedly. Globalization, in the form of the necessity for monetary union, creates an external need for the internal reforms that both France and Germany desperately need. This is the political use of globalization as high art.
But this version of the political economy of globalization and monetary union does not favor all interests. I think Britain’s reluctance to enter into monetary union (and into other aspects of the Maastricht agreements, including especially the social chapter) reflects misunderstandings over what the single currency really means.
The conventional wisdom, as noted a few pages back, is that Britain’s reluctance to commit itself wholeheartedly to Europe reflects deep concerns about autonomy and national sovereignty. “Eurosceptics” do not wish to give up the right of self-determination, especially on economic and social policies, to a less disciplined Europe.
My own interpretation of the interests involved goes a good deal beyond this. Of all the countries in Europe, Great Britain has gone the farthest in market liberalization and has therefore already borne the political costs that await other European nations. Britain’s old system of industrial and union relations was one, although not the only, cause of that nation’s dismal economic performance for much of the postwar era. The Thatcher revolution removed many of the structural rigidities:
During the 1980s, there was a substantial shakeout of inefficiencies in the British economy and, by now, the UK was no longer an economy with relatively low scope for catch-up.... Our own results... suggest (1) that the structure of industrial relations in the UK, with its unfortunate emphasis on fragmented bargaining and multiple unionism, operated to reduce TFP [total factor productivity] growth prior to the 1980s, and (2) that the changed industrial relations scene of the recent past has not only allowed a once-and-for-all productivity gain, but also improved future growth potential. 33
Britain has begun to experience the economic benefits of reforms, in terms of both reduced unemployment and increased prospects for low-inflation growth. But it has also borne the social costs of the policies that were sharply divisive: “The one large European country where unemployment has fallen substantially—Britain—has junked any attempt at consensus: successive Conservative governments have stripped away the powers of trade unions, while managers’ performance is measured by the stockmarket not by the smoothness of negotiations with workers or politicians. Britain has the lowest jobless rate among big European countries.” 34
Because these social and political costs have already been paid and the economic benefits are already being received, within the analytical framework I am using here, Britain does not have much to gain from monetary union. For France and Germany, monetary union is the way to make Thatcherite domestic policies economically necessary and politically possible. Britain, already having experienced the Thatcher revolution, risks losing ground on labor market policies as part of a single currency area. The risk, to be clear, is that it might be forced to weaken its reforms in order to “harmonize” its policies with those of France, Germany, and the other countries in the currency area.
In an article titled, provocatively, “Thatcherites in Brussels (Really),” The Economist noted accurately that monetary unification would force Europe to be more like Britain:
Sir Leon Brittan, the external trade commissioner, is clear about the impact of EMU (which, amongst other things is designed to complete the single market). “European monetary union,” he says, “is forcing European countries to adopt Thatcherite policies.” Governments that for years had shied away from attacking bloated public sectors are at last doing so in order to meet the Maastricht criteria for low budget deficits and debt levels. Subsidies are being slashed, not because governments dislike them but because under Maastricht they can no longer afford them. 35
A single currency will force Europe to be more like Britain, in certain ways. Britain’s reluctance to risk its hard-won reforms makes sense in this context—much more sense, I think, than as flag-draped xenophobia. As The Economist has noted, “In a sense it is Britain, not the continent, that may now be more in tune with the European project—the ultimate irony for Eurosceptics.” 36
The location of the economic solution to Europe’s economic problems has been known for some time. Writing in the late 1980s in “Europe in the Economic Crisis of Our Time,” Harold Van Buren Cleaveland noted that
The solution of the European problem of excessive labor costs depends critically on the attitudes that shape wage bargaining. If collective bargaining remains, as it was in the 1970s, an arena of struggle over distributive shares, and if the consequences for investment, productivity, and employment are left out of consideration, the European crisis will be with us indefinitely....
If hypocrisy is the tribute that vice must pay to virtue, it is a big change that virtue has switched sides.... There are respected economists on the left side of the political spectrum, such as Alain Minc in France, who have suggested that an across-the-board cut in real wages and salaries would be the most direct way out of the employment crisis.
So radical a program is unlikely to attract much support—or to work if perchance it were attempted. The negative effects on demand and on social peace would no doubt cancel the positive effects. A gradualist alternative has more to recommend it. 37
But gradualism did not solve the problem in Europe during the 1990s. The threat of globalization and the defense of monetary union, however, may provide the means for the radical reforms that have long been necessary.
Unsettled Political Foundations
Globalization is a powerful force—probably more potent in politics than it is in economics. It is also a dangerous force. The promises and threats of globalization can be used to motivate and justify many kinds of political actions. When political agendas conflict, globalization can produce a crisis. The examples that I have used in this chapter illustrate this potential.
William Greider uses the threat of globalization to call for the formation of a global labor union to represent the global class interests of alienated workers. In Europe and elsewhere, however, the threat of globalization is used to promote domestic policies that would weaken unions and make labor markets more competitive. Greider imagines a showdown between the class interests of global labor and global capital. But I don’t think global capital will fight. The force that will oppose labor is the state, which will be compelled to fight unemployment and economic stagnation with the only tools it has left—labor market reforms that directly conflict with the established interests of organized labor.
In other words, the welfare state (a government organized to promote economic stability, equality, and growth) may be driven by globalization and by the constraints it seems to impose to dismantle the policies of the welfare state. The political crisis of globalization is contained in the internal illogic of this situation—or at least that seems to be true in Europe.
The economics of globalization will not produce a crisis of class conflict because actual globalization is not that strong a force. But as Greider’s neo-Leninist polemic and my own analysis of monetary union in Europe suggest, the actions that are taken because of globalization (or a fear of globalization) just might.
Endnotes
Note 1: William Greider, One World, Ready or Not: The Manic Logic of Global Capitalism (New York: Simon & Schuster, 1997), p. 11. Back.
Note 4: Norman Angell, The Great Illusion (New York: G. P. Putnam’s Sons, 1911). Back.
Note 5: Robert Wade, “Globalization and Its Limits: Reports of the Death of the National Economy are Greatly Exaggerated,” in National Diversity and Global Capitalism, ed. Suzanne Berger and Ronald Dore (Ithaca, NY: Cornell University ress, 1996), p. 60. Back.
Note 6: The Beveridge Report of 1946 (after Lord William Beveridge, director of the London School of Economics) proposed a “welfare state” to provide economic security as an alternative to Hitler’s “warfare state.” Back.
Note 7: Peter F. Drucker, “Trade Lessons from the World Economy,” in Readings in International Political Economy, ed. David N. Balaam and Michael Veseth (Upper Saddle River, NJ: Prentice-Hall, 1996), p. 93. Back.
Note 9: Susan Strange, “States, Firms, and Diplomacy,” in International Political Economy: Perspectives on Global Power and Wealth (3rd ed.), ed. Jeffry A. Frieden and David A. Lake (New York: St. Martin’s Press, 1995), p. 67. Back.
Note 10: The cases of Boeing and Microsoft in Chapter 2 generally support Strange’s views of the changing nature of foreign policy (that firms have foreign policies now, just like nation-states, and that bargaining between firms and states is now common), if not her broader conclusions about economic policy. Back.
Note 11: Wolfgang Streek, “From Market Making to State Building? Reflections on the Political Economy of European Social Policy,” in European Social Policy: Between Fragmentation and Integration, ed. Stephan Leibfried and Paul Pierson (Washington, DC: The Brookings Institution, 1995), pp. 389-431. Back.
Note 12: Michael J. Braun, An Imperfect Union: The Maastricht Treaty and the New Politics of European Integration (Boulder, CO: Westview Press, 1996), pp. 159-160. Back.
Note 13: I do not think that the EU has any choice about eventual eastward expansion. An economically and politically divided Europe is fundamentally unstable. To refuse further integration would be to forget all the lessons of 50 years of successful economic and political diplomacy in Europe. Back.
Note 14: This is the estimate of Richard Baldwin, Joseph Francois, and Richard Portes, as reported by The Economist (April 12, 1997), p. 84. Back.
Note 15: All figures given are reported by The Economist (April 26, 1997), p. 120. The United States reported a 5.6 percent unemployment rate. Back.
Note 16: Michael J. Braun, An Imperfect Union, pp. 60-61. Back.
Note 17: The incomplete nature of these regional arrangements requires further comment. Although monetary union would end exchange rate instability within the domain of the single currency, thus removing an important barrier to economic integration, it would not guarantee stability with respect to other currencies, especially the dollar and the yen. In fact, I think it is likely that speculation would intensify in the euro-dollar, euro-yen, and yen-dollar markets, leading to even more chaotic currency movements and possibly even more severe currency crises between the regional arrangements than within them. Perhaps a European central bank will have sufficient reserves to discourage speculative attacks on the euro, but the systematic behavior that creates currency chaos would remain. Instability is shifted to a new and higher level in this scenario. Regional integration may come at the cost of even less complete global integration. Back.
Note 18: This discussion is based on Paul De Grauwe, The Economics of Monetary Integration (2nd ed.) (New York: Oxford University Press, 1994). Back.
Note 19: I would argue, in fact, that the regional assistance programs are more political than economic in their motivation and effect. It is not clear that they have made any significant difference in regional income disparities, but they have provided funds for politicians from poorer regions. Back.
Note 20: Barry Eichengreen and Jeffry A. Frieden, “The Political Economy of Monetary Unification,” in International Political Economy (3rd ed.), ed. Jeffry A. Frieden and David A. Lake (New York: St. Martin’s Press, 1995), pp. 273-274. Back.
Note 21: Martin Wolf, “This Emu Can Surely Fly,” Financial Times, April 29, 1997. Back.
Note 22: Wolfgang Streek, “From Market Making to State Building?,” pp. 420-421. Back.
Note 24: Toyoo Gyohten, “Strong Yen for the Euro,” Financial Times, May 14, 1997. Back.
Note 25: Named for Robert Mundell and J. Marcus Fleming. Back.
Note 26: “The Politics of Unemployment: Europe Hits a Brick Wall,” The Economist (April 25, 1997), p. 25. Back.
Note 27: “Thatcherites in Brussels (Really),” The Economist (March 15, 1997), p. 23. Back.
Note 28: “The Politics of Unemployment,” p. 25. Back.
Note 29: Pierre Ssicsic and Charles Wyplosz, “France, 1945–92,” in Economic Growth in Europe Since 1945, ed. N.F.R. Crafts and Gianni Toniolo (Cambridge, UK: Cambridge University Press, 1996), p. 236. Back.
Note 30: Wendy Carlin, “West German Growth and Institutions, 1945–90,” in Economic Growth in Europe Since 1945, ed. Crafts and Toniolo, pp. 460, 490-491. Back.
Note 31: “Europe Isn’t Working,” The Economist (April 5, 1997), p. 13. Back.
Note 33: Charles Bean and Nicholas Crafts, “British Economic Growth Since 1945: Relative Economic Decline... and Renaissance?” in Economic Growth in Europe Since 1945, ed. Crafts and Toniolo, p. 161. Back.
Note 34: “Europe Isn’t Working,” p. 13. Back.
Note 35: “Thatcherites in Brussels (Really),” p. 25. Back.
Note 36: “Thatcherites in Brussels (Really),” p. 23. Back.
Note 37: Harold Van Buren Cleaveland, “Europe in the Economic Crisis of Our Time: Macroeconomic Policies and Microeconomic Constraints,” Recasting Europe’s Economies: National Strategies in the 1980s, ed. David P. Calleo and Claudia Morgenstern (Lanham, MD: The Washington Foundation for European Studies, 1990), pp. 197-198. Back.
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