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Brexit: It’s Not About the EU, It’s About the EZ

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“Politics is the concentrated essence of economic forces in motion.” Forget the politics of the June 23 Brexit referendum for a minute. Let’s take a look at the money.

The European Union (EU) was founded in 1993. Its distinguishing feature, as set forth in the Treaty of Maastricht, was the aim of a common currency – the euro. Today there are twenty-eight countries in the European Union, of which 19 belong to the Euro Zone (EZ), those countries which use the common currency.

Germany was reunified in 1990. The EU is one of the foremost outcomes of German reunification. The common currency of the EZ makes the EU fundamentally distinct from all previous European common economic zones.

Reunified Germany has the largest population and the largest economy in Europe. The expansion of the EU and the EZ were driven by an alliance of Germany and France. From the beginning there were those who understood that Masstricht and the euro were intended to be instruments of German domination of Europe.

Britain is a member of the EU but not of the EZ. It continues to use its own currency, the pound. The City of London (the traditional name of the financial district) comprises the world’s largest international brokerage, even larger in that respect than Wall Street. Switzerland, a country crucial to international banking, is a member of neither.

Germany is a manufacturing powerhouse. Huge export accounts are the key to its longer term economic stability. One justification of the EU is it keeps the Germans busy making autos and elevators instead of panzers. But the problem isn’t Germany. It’s capitalism.

Due to the common currency, the Eurozone is an unrestricted export domain. Trade imbalances can no longer be corrected by changes in currency exchange rates. Here’s how it works when countries have their own currencies:

Let us say that in 1991 the German deutschmark and the Greek drachma are at parity, i.e., they are exchanged one-for one. Greeks like German cars and Germans like Greek wine. Things go on this way. By 1995 German auto makers hold one million drachmas from their Greek sales, and Greek vintners hold 100,000 deutschmarks from their German sales. Now ten drachmas are exchanged for one DM.

That nifty Benz that sold for 50,000 drachmas in 1990 costs a cool half million by 1995. A bottle of Greek wine that sold for in Germany DM20 in 1991 is only DM2 in 1995. Now Greece is selling lots more wine to Germany and Germany is selling very few cars in Greece. Trade and the exchange tend to even out around some sort of equilibrium.

The balancing-out of exchange rates in EZ countries disappeared when the euro went into circulation in 2002. The euro is really the deutschmark rebranded The European Union functions to work out international finances on a broader basis. . Germany is the country that by far benefits the most.

Unrestricted imports stunt the production sectors of countries on the receiving end. But, production, and production alone, creates new capital and new value. The EZ countries that run chronic balance of payments deficits end up no longer doing enough of their own production. They can’t pay the bills for the stuff they import.

Greece had longstanding problems with trade deficits. At the time of the adoption of the euro in 2002, its bore over $50bn in accumulated trade deficits. Membership in the EZ rapidly made things worse.

By 2005 the trade deficit grew to $13bn. The cumulative debt had plunged to over $100bn. The bottom had fallen out.

In 2009 the annual deficit was over $50bn, the cumulative approached $300bn.

When the crisis came in 2015 the cumulative deficit was around $370bn. Subject to these conditions, by 2015 Greek GDP had shrunk by 25% in five years.

Meanwhile Germany ran enormous trade surpluses, around $250bn in 2014. It ended up with profits that vastly exceed anything that could profitably be re[i]invested in production. Germany, like all developed capitalist countries, has a slow-growth economy. All of them have huge amounts of capital for which they cannot find any profitable investment.

To make up for the lack of real capital expansion the Greek government issued bonds valued in the hundreds of billions of euros. Huge amounts of Greek bonds ended up in foreign hands.

But the Greeks were not able to put the bond money to productive use, since somebody else was already doing the manufacturing. The money went for patronage jobs and the like. Greece still couldn’t repay the bonds. One problem had only been replaced with another. Still there is a means of recourse for governments with their own currencies. In an emergency they can devalue their currencies.

Let’s say a government has bonds in the amount of a million smackers coming due, but has only 500,000 smackers with which to repay. If it must, it can devalue its currency at two to one. Now it has a million smackers with which to repay. It’s only repayment at 50% but it’s the better course if disaster is the only alternative.

Lacking its own currency, Greece could not do that – and met disaster. It was forced to make payments toward its bond obligations that wiped out its economy. Portugal, Italy, Ireland, and Spain are close to the same condition.

Financial markets in Europe lost over a trillion dollars in value in a few days following the Brexit vote. The Greek crisis made clear that maintenance of the unbalanced trade relations of the EZ requires all kinds of financial chicanery. It was already known that European securities markets were overvalued. All the collapse needed was a signal. Now the horse is out of the barn. It hardly matters what Britain does next. The EU is doomed because the EZ is economically unworkable.

The right in Britain took command of the Brexit issue with a “blame the victim” campaign of racism against immigrants, of Islamophobia, and ultra-nationalism. The left was ineffective for no good reason.

It is essential to understand the economic roots of the Brexit crisis. The crux of the matter is the Euro Zone. Hardly anybody is talking about it. The crisis cannot be explained exclusively in political terms. It is necessary to bring political economy to the struggle against xenophobia, ultra-nationalism, and right-wing havoc.

Marx and Engels laughed that professors found their theories hard and workers found them easy. Maybe it is time for the left to be more like workers, do its job and explain the crisis in terms of political economy.

Notes.

[i] https://www.quandl.com/data/ODA/GRC_BCA-Greece-Current-Account-Balance-USD-Billions

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