The Euro and transnational capital

1 Aug

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.

4 Responses to “The Euro and transnational capital”

  1. Lee Jones August 3, 2011 at 3:42 pm #

    Thanks for this response. However, I don’t think you’ve disproven what I suggested. It is not surprising that Germany and France, as the two biggest economies in the Euro, would also rank as its FDI ‘stars’ and show the largest concentration of flows (disregarding tax havens) – this is a pattern established in the 19th century. What you would need to do is look at Germany’s outward FDI flows, which do actually show substantial flows to Eastern European euro member-states.

    I don’t have much time to look into this fully (my original point was gleaned, I think, from the work of people like Bastiaan van Apeldoorn – it’s not something I know a great deal about). But this report from 2006 ( makes clear that German FDI to and imports from central Europe have risen substantially in, for example, transport equipment (see p.54). Employment in FDI companies outside Germany has also increased substantially (p.48). As your blog has, I think, noted, real wages in Germany have either stagnated or even declined since the Euro has been introduced; it would be surprising if this was not linked to implicit or explicit threats to offshore production unless workers moderated their wage demands (plus greater labour mobility within Europe more generally). I’m not necessarily saying that I am 100% correct, but it needs a lot more scrutiny to be disproven.

    In any case, the benefits that German capital gets from the Euro are far wider than just one throwaway remark in a blog comment would suggest. One benefit, it seems to me, is that the Euro prevents member-countries changing their competitiveness by manipulating their currency against their rivals’. Arguably this advantages member-economies which enjoy or can more easily create other competitive advantages, e.g. high labour productivity, technological know-how, capital concentration, economies of scale, etc. This has helped Germany consolidate its grip over intra-European exports. Another benefit is that it has assisted German financial institutions to expand further into European markets. Notably in the report I cited earlier, the top three destinations of FDI were financial services, holding companies and banks (p.46).

    My broader point, then, was really about the way the Euro had worked to the overwhelming benefit of German business (and at the expense of peripheral nations) and that this naturally has a real impact over how the German government seeks to manage the crisis. This handy guide from the FT ( shows that German banks are exposed to EUR250bn of sovereign debt in European countries. Looked at the other way around, German banks account for 31% of Greece’s sovereign debt. This article ( indicates how these considerations have influenced German policy on the Greek bailout.

    I don’t want to dispute your basic position that the Euro and how to manage the current crisis involves subjective and political factors. But I do hope to persuade you that it also involves very real economic agents, forces and flows, and any account that ignores these factors will be missing very significant parts of elite calculations.

    • The Current Moment August 4, 2011 at 2:26 pm #

      All those points are well made. The question is really about the causal role of the Euro in all of this. What we are arguing is that the Euro reflects the underlying uneveness of the European economy. That doesn’t mean that it doesn’t have any effect in its own right or that it hasn’t benefited one set of interests over another. But the fundamental point is that these are really outcomes of the European economy more than they are consequences of the Euro as such. So for instance, you are right to say that the single currency forces member states to achieve competitiveness via internal reform rather than through currency manipulation. This is generally true of all fixed exchange rate regimes and in that respect they favour countries with stronger and more stable currencies as they have less painful internal adaptation to do in order to maintain their competitiveness. But here what has mattered for German competitiveness has not been the Euro but the German government’s ability to secure moderate wage settlements from its main unions. In the early 2000s, Germany was suffering under what seemed an overvalued Euro. So it squeezed labour in order to boost its competitiveness. Southern European economies and Ireland have in contrast seen wages rise and competitiveness fall. In that story, the Euro neither benefits nor harms German business; at issue is whether governments can secure wage moderation. I don’t think it was a done deal that German unions were going to agree to what was being asked of them but that is how it worked out. So generally, I’d say our disagreement isn’t so much about economic forces versus political ones, though we are saying that much of the attachment to the Euro is because of the political institutions that have been created around it. Rather, the point here is about whether currencies are doing as much work as you seem to be suggesting that they are. They play a role, but in a more derivative, secondary way, reflecting the balance of other economic factors. Exchange rates are a bit like inflation in that way: as much an outcome of class conflict as a cause of it.

  2. Lee Jones August 4, 2011 at 3:13 pm #

    Fair enough, but as I said earlier I don’t think you can rule out the existence of the Euro as an important means by which German workers were ‘squeezed’.


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