We have argued before that one of the mysteries of the ongoing Eurozone crisis is how doggedly attached member state governments are to its survival. For all of its manifest weaknesses, the Euro lives on. One suggestion made by a reader of The Current Moment was that lying behind the Euro’s longevity in the face of crisis was the interest of transnationalized European capital. The Euro has made it possible for dynamic European capitalists to exploit low wage opportunities in diverse parts of the Eurozone, resulting in a transnationalized capitalist class that today benefits greatly from the Euro.
It is worth seeing whether the figures support this. Generally, the effects of a currency union on foreign direct investment (FDI) can go both ways. It can reduce the need for such investment as the incentive of setting up a whole operation in another country in order to be able to sell goods in that domestic market is lower. Lower cross-border transaction costs mean that FDI will be replaced by trade. However, it can also boost FDI by making the spread of production processes across borders easier and cheaper. Specific cost gains can be made by locating parts of production in one place that has lower wage costs for that particular activity.
How this has played out in the Eurozone is not clear. Estimates vary, suggesting that intra-Euro FDI flows have increased as a result of the Euro’s introduction by between 14% and 36% (European Commission report, EMU@10, p35). Other studies have found that the link between the introduction of the Euro and FDI flows is much weaker. A paper co-written by Geneva-based economist Richard Baldwin and a number of colleagues on the trade and FDI effects of the Euro makes some interesting points. It notes that the “stars” of FDI within the Eurozone are by far Germany and France, both in terms of outward and inward FDI. This runs against the notion that FDI is driven by Northern European capitalists seeking profit opportunities in low wage parts of the Eurozone. It is, in fact, difficult to know where these low wage parts might be. Countries such as Ireland, Spain, Portugal and Greece were all characterized by above-average increases in wages since the introduction of the Euro – something likely to put off, not encourage, outside investors.
Baldwin et al also note that 70% of all intra-Eurozone FDI flows for the period 1999-2003 were from or to Luxembourg, a result driven by the peculiarities of Luxembourg both in terms of taxes and transparency and unrelated to the Euro as such. Looking specifically at the German case, there is little evidence of German FDI having been driven by the exploitation of lower-wage Eurozone economies. Most of the out-sourcing of production that has occurred has taken place in those EU members outside of the Eurozone, namely in Central and Eastern Europe and further afield. Other German FDI activity has tended to be flagship merger and acquisition deals, of the kind seen in the telecoms sector, driven more by stock market patterns than by the creation of a currency union.
There are other economic benefits from the introduction of the Euro. Trade effects for instance have been important. It would still seem though that the desire to preserve the Eurozone at all costs appears – from the perspective of a private investor or a German-based CEO – quixotic. Greece after all only represents 3% of the Eurozone’s total GDP. Why keep it within the Eurozone if its membership risks spreading contagion to other much larger member states? In answering this question, the economic gain from the Euro is important but not decisive. More critical is the role the Euro plays in the wider world of macro-economic policymaking in Europe.
For Eurozone members, the Euro is not just a currency, it’s a way of making decisions. It involves the Eurogroup and its attendant committees and officials, the European Central Bank and all national central banks of the Eurozone and the meetings of all EU member finance ministers in ECOFIN. This kind of integrated decision-making has become the dominant way in which macroeconomic policy is both practiced and understood today in Europe, by core and peripheral economies within the Eurozone. This, more than the economic benefits of monetary union, explain the Euro’s survival so far in the face of crisis.