Is the European Union Capable of Integrating Diverse Models of Capitalism?

Alison Johnston, Aidan Regan, Alison Johnston, Aidan Regan

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000373813
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The 2009 European sovereign debt crisis and the EU's policy response to it have prompted scholars to re-think whether diverse national models of capitalism can thrive within the European Union (EU). Are some national economic systems better suited to adapt to European integration than others, and if so, why? Contributions within this volume provide a qualified yes to these questions raised, concluding that the EU favors export-led growth models while it penalizes and discourages domestic consumption-oriented growth paths, particularly those that are financed by debt-accumulation. The book questions whether the EU is capable of integrating these diverse capitalist regimes.

This volume adds a comparative capitalism perspective to EU integration scholarship in order to demonstrate that ever-closer union is not capable of accommodating diversity in national economic institutions. Chapters in this volume provide an innovative framework for understanding what factors related to European integration impede the economic and political integration of diverse European market economies. While recent comparative capitalism literature highlights that European monetary integration has favored export-led growth regimes, contributions in this volume outline that the EU's prioritization of export-led growth over domestic-demand led growth is present in other facets of integration, including EU accession, financial integration, the free movement of people, fiscal governance and the Europe 2020 growth strategy.

The chapters in this book were originally published as a special issue of New Political Economy.

OPEN ACCESS

Better Than the Euro? The European Monetary System (1979–1998)

Martin Höpner and Alexander Spielau

ABSTRACT

The euro crisis has provoked a debate on the pros and cons of adjustable exchange rate regimes that enable their participants to negotiate nominal de- and revaluations. To evaluate the functioning of such regimes, we revisit the EMU’s predecessor, the European Monetary System (EMS). We show that in the EMS, devaluations did indeed help more than revaluations did hurt. Assuming that the political-economic heterogeneity of the Eurozone will not vanish in the foreseeable future, the move to a more flexible exchange rate regime might therefore be economically advantageous. However, a purely economic view ignores the huge political ‘maintenance costs’ of negotiable realignments, costs that the EMS members aimed at overcoming when they opted for the euro. The re-politicization of nominal exchange rate policy in today’s Eurozone would therefore not end transnational political conflicts in the Eurozone but fuel new ones.

Introduction

The euro area has entered into difficult waters. Its core problem is finding solutions for the transnational macroeconomic imbalances that occurred since the introduction of the Euro (Scharpf 2013, 2016, Johnston and Regan 2016, Walter 2016). Today, the euro consists of a number of overvalued euros in the South and undervalued euros in the North. The usual answer to such constellations are nominal de- and revaluations. Given that such adjustments are impossible in a monetary union, critical economist such as Flassbeck and Lapavitsas (2015) have argued in favour of returning to an adjustable exchange rate regime such as the European Monetary System (EMS) that existed between 1979 and 1998.

The EMS aimed at sheltering its members from erratic financial markets, but also enabled its members to de- and revalue their currencies if necessary. The economic preferability of discretionary exchange rate systems under conditions of political-economic diversity, however, is far from undisputed. De- and revaluations, critics such as Mabbett and Schelkle (2015) argue, had only limited success in solving economic problems and rather contributed to new long-term distortions. We will revisit the EMS and show that the 62 de- and revaluations that were conducted among its members between 1979 and 1998 actually helped to minimise transnational macroeconomic imbalances. This insight, however, just opens up yet another puzzle: If the discretionary solution fits better into a heterogeneous Europe, why did the governments of the member states opt for the change from the EMS to EMU in the first place?

This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

This article suggests that the answer lies in the trade-off between political and economic costs of exchange rate regimes. While we know today that the Euro’s economic maintenance cost are much higher than its founders had expected, we tend to forget that the maintenance of the EMS was extremely costly, too – in political terms. There was, in other words, a discrepancy between the functioning of the exchange rate regime as a provider of macroeconomic stability, on the one hand, and the constant emergence of political conflicts while maintaining it, on the other hand. The EMS achieved economic results but failed on the politics. The monetary union thus appeared to be a relief on the political side of this trade-off by depoliticising currency politics through the removal of national currencies. Under conditions of political-economic heterogeneity, we conclude, exchange rate regimes fail to deliver political and economic expediency at the same time.

We will begin by summarising the features of the EMS (the second section). This gives us the basis for examining the political-economic processes in the EMS in its various phases (the third section). The next section (the fourth section) takes a closer look at the 62 exchange rate adjustments made in the EMS. To conclude our empirical observations, the fifth section looks at the political conflicts that accompanied the adjustment decisions. By way of illustration, this section selects a typical revaluing country (Germany) and a typical devaluing country (France) from the EMS countries. The concluding sixth section contains a summary of the findings of the empirical sections, which are then interpreted in light of the debate surrounding the future of the euro.

The structural elements of the European monetary system

The EMS was a discretionary exchange rate system which provided for quasi-automatic mandatory intervention to reduce exchange rate fluctuations, on the one hand, and – this is the discretionary element – political negotiations on the redefinition of the parities, on the other hand (for more details, see Collignon 1994, Bernholz 1998). The EMS existed from 1 March 1979 up to the point where exchange rates for euro area countries were fixed at the turn of the year 1998/1999.

The crucial element of the EMS was the exchange rate mechanism (ERM), although the member states could opt out of the ERM if they had a valid reason.¹ The rationale behind the ERM was to peg national exchange rates to an internal accounting unit called ECU with a possible ±2.25 per cent deviation from the respective ECU parity. These permissible so-called ‘fluctuation bandwidths’ of ±2.25 per cent did not apply to all the participating currencies, however: the Italian li...