Notes on the Euro crisis

The role of most central bank is to issue the state with credits in the form of drawing rights and banknotes which the state then uses to pay public employees. The state then collects taxes for which it will only accept in payment notes or credits denominate in the currency issued by its central bank. These taxes are then used by the state to pay off its liabilities to the central bank.


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In most countries with their own currencies, the state has almost unlimited drawing rights on the central bank, but it is very unwise for it to use these rights rashly since the over issue of notes which are not clawed back via taxation leads to inflation.

The situation in the Euro Zone is quite different. There are now 3 bodies to consider

The ECB
The Commission
The nation states: Germany, Spain, Holland etc

The ECB is independent and neither the Commission nor the nation states have the kind of unlimited drawing rights on it that the UK government has on the Bank of England.

The nation states are obliged to levy taxes and pay wages in Euros, but the only way they can make up a temporary shortfall in revenue over expenditure is by recourse to the private bond market. They can not just instruct the ECB to issue them with credits.

Now the ability of different states to raise money on the bond markets depends on the estimates by the private banks of the future ability of the states to pay these bonds back in Euros. For countries running a trade surplus like Germany this is not much of a problem since there are more euros flowing into the country than flowing out. A country like Spain or Greece who is running a trade deficit, can only sustain the deficit if the private bond market is willing to extend credit to the Spanish state and the Spanish banks.

Why does Germany run a trade surplus : two basic reasons

It has a more rapid rate of development of the productivity of labour
The share of real wages in national income has been held down by austerity programmes

The first means, due to the law of value, that the prices of German industrial products fall relative to those made for example in Spain. The second means that the rising industrial production of Germany can not be sold on the home market to German workers.
This leads to chronic trade deficits in some countries and surpluses in others.

Such deficits and surpluses can be accomodated within a monetary union if there is a strong central government that redistributes income between areas via taxation.

The UK has a monetary union. The Scottish and Northern Irish pounds are tied to the English pound at a one to one rate, and the Scottish Government, is unable to get the Bank of Scotland to simply advance it credits in Scottish Pounds the way the Westminster Government can with the Bank of England.
Wales and Northern Ireland for example run a deficits with the rest of the UK ( for Scotland it is harder to say as it depends on how you count oil revenues ).
But the Welsh government does not have to impose the sort of austerity that Greece has to impose because it has a subsidy from London of some £20 billion a year, and moreover pensions are met by the central government.

In the Eurozone the Commission had negligible revenue - 3% VAT if I remember correctly, and it can not just raise income tax to get more revenue. So there is no possibility of the Commission paying large subsidies to deficit regions. Instead the deficit countries have to go begging cap in hand to the Council of Ministers or the Troika, asking for loans from other national governments. This is not a sustainable situation.

There are only two real courses out of this: Either the Euro breaks down and countries revert to national currencies which float freely relative to one another, or the process of redistribution of revenue is taken out of the control of the bond markets and done via tax revenues raised by the center.

The workers movement accross Europe should be demanding that the Union Parliament be given the right to tax income and property accross the Union with a uniform code of taxation to prevent the rich shipping the money from one country to another to avoid paying tax, and to provide it with the income necessary to redistribute income accross the Union.
They should also be demanding a reduction in exploitation in the most productive countries like Germany, so that the products of German industry can be sold on the home market.

In the EU programme that I and Heinz Dieterich put forward we advocate these measures along with more radical steps - elimination of exploitation, cancellation of debts and direct popular legislation at the union level.

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