Return to national currencies? Not so fast!

Oskar Lafontaine, the former Die Linke chairman and a figure of the German left, has recently called for a return to national currencies. But while frustration with the euro is widespread, his solution doesn't make sense from an economic, political or even moral point of view.

Oskar Lafontaine in 2008. Flickr/Roland Moriz. All rights reserved.Oskar Lafontaine in 2008. Flickr/Roland Moriz. All rights reserved.

The Euro area was set up with a common monetary policy but no common fiscal, wage or industry policy. Oskar Lafontaine’s call to leave the euro and return to national currencies has focused on the divergent development of wages since the introduction of the euro.

The key variable here is wage costs per unit of output, which depends on the growth of wages and the growth of labour productivity. The European Central Bank has an inflation target of 2 percent a year. To be compatible with this, unit wage costs should rise by around 2 percent a year. However, between the introduction of the euro in 1999 and the onset of the international financial crisis at the end of 2007, there was a marked divergence in the growth of unit wage costs in different euro area countries:

- In France unit wage costs did go up by around 2 per cent a year;

- In Germany, as a result of a policy of wage restraint, unit wage costs did not rise at all, and on some measures they actually fell slightly; this policy of ‘wage dumping’ contributed to a rising German trade surplus, and this off-set the lack of growth of domestic demand in the country;

- In southern Europe, unit wage costs rose by more than 2 percent a year (because of higher inflation, real wages did not rise so strongly); this was accompanied by a rising trade deficit, largely financed by bank loans from Germany and France; the reversal of these capital flows since the onset of the euro area crisis in 2010 has put these countries at the mercy of EU-imposed austerity policies.

The common European currency offers the possibility of obtaining much greater democratic control over economic policy than a set of national currencies. It reduces the ability of investors in private financial markets to speculate against currencies and to impose major changes on economic policy, as occurred in the US in 1979, in France in 1982 and in the European Monetary System (EMS) in 1992. A return to national currencies with pegged exchange rates, as in the EMS from 1979 – 99 is not possible; it would require re-introducing capital controls between countries (as Lafontaine notes). But the economies of the euro area have become even more integrated since 1999, and without a massive dis-integration it will be very difficult to impose capital controls that are effective.

The alternative is to push for a deepening integration of economic policy:

- Coordinated wage policy: the major shift in the distribution of income from wages to profits that has occurred in nearly all countries should be reversed; the German policy of ‘wage dumping’ must end; rising wages in Germany (and in the production chain for German products in Eastern Europe) will strengthen demand for the exports of other European countries;

- Coordinated fiscal policy: countries with large euro area trade surpluses must contribute to financing transfers to countries with deficits; the euro area budget of 1 percent of GDP (and due to be cut slightly 2014-2020) is totally inadequate and must be raised so as to be able to ensure full employment at a regional, national and European level;

- Coordinated industrial policy: it is urgently necessary to promote well-paid, high-skilled jobs, especially in the euro area periphery, and to reverse the process of de-industrialisation suffered in southern Europe since the single currency was introduced; more generally we must strive to find ways of establishing far greater democratic control over the giant corporations that dominate economic activity in Europe, and which evade national control by playing countries off against each other.

There is a risk that the euro area could break up. But the interests of both large corporations and key national states are so tied up with the euro that they will do everything possible to prevent this. Calling for leaving the euro is therefore not something that is likely to be successful. But more importantly, it is not desirable. By calling for it, we would also be aligning ourselves with highly undesirable nationalistic forces of the political right who are motivated by quite different aims.

Major industrial and financial corporations are organised internationally; at the European level there is a possibility of establishing greater democratic control over their activities; a step back towards the nation state would be a move in the wrong direction.

About the author

Trevor Evans is professor of Monetary Theory, Monetary Policy and International Currency Relations at the Berlin School of Economics and Law. He is a member of the Steering Committee of the European Economists for an Alternative Economic Policy (EuroMemo) network.