The Euro or a Sustainable Future for Britain? Dr Caroline Lucas MEP & Dr Mike Woodin

The following document was first published in 2000, It is taken from a PDF file so some of the text/spacing format has been lost but the words are unedited. For more information regarding the environmental arguments for Brexit visit Green Leaves.

Introduction

It seems that  anyone  opposed  to  the  single  currency has  to get used to  being  caricatured  as an antediluvian  “little  Englander”. After all,  the argument  goes,  anyone who is  on the  same side of the debate  as Rupert   Murdoch   must  be reactionary,  xenophobic, and “anti-European;’.    Well, no,  actually. Whilst  it  is certainly true that opposition to the Euro brings with  it some strange and often questionable  bed-fellows,  it  is perfectly  possible –  and urgent – for  progressive   internationalists   to  oppose  the  single  currency. That does not make  us anti-European.  Far from  it. It  is  precisely because   British Greens have a  wider  vision about the  role  of Europe that  we are so critical  of the  narrowly defined  economic objectives  of the  EU,  of which  European  monetary  union  (EMU) is  such a  key part.

We believe that  the  EU must  put social  and environmental  justice at the heart  of its  domestic   and  international  policies.   To do this it must promote strong, diverse, self-reliant  regional economies. But  one of  the  overriding   aims  of the single  currency  is to  turn Europe into  one  giant   economic   superpower,   able  to  compete more  efficiently   with   the   US  and  Japan.   To  this   end   it   is increasing   economic  centralisation   and  international  trade,   and is accelerating  the  process  of economic  globalisation.

We  therefore  oppose  EMU  and   the   single    currency,   not  for narrow   nationalistic   reasons,  but  because we  believe that  the economic  logic  of  this  dubious  experiment   is flawed  and  rides roughshod over our  key social   and  environmental   concerns.

The purpose of this  report is to set out a Green critique of both the process  and  the   goal  of   European  monetary  union,   and  to demonstrate  how  joining   the  Euro  would  prevent Britain from moving  beyond conventional economics  to  the  economics   of sustainability.    The  first   section   introduces   the   economics    of sustainability.  The second section examines how the entire  EMU project  has been shaped to meet corporate needs,  and how it will accelerate the process of economic globalisation     a process that is moving precisely  in  the opposite  direction  to the economics of sustainability. The third section  explores the key features of EMU in  more detail  and  shows how they act as obstacles to achieving the goal of sustainable  development.  The  fourth and final section sets out a Green alternative that puts sustainability at the heart of its  economic system, and which   is based  on  a locally  sensitive, decentralised system of democratic control.

SECTION  ONE: THE  ECONOMICS OF SUSTAINABILITY

The  central  aim  of  Green  politics  is  to  create  a  truly  sustainable society; one that  meets basic human needs in  a way that  will allow the  natural systems- of the planet to  continue  meeting those  needs indefinitely.   This   requires   a  genuinely   equitable   distribution    of resources, not only amongst the current human population,  but also between our own  and future generations.  It also  depends  on a truly democratic  system of governance where the needs of even the most marginalised are heard and recognised.  Only when a full commitment to  equity  has  been  established  will   people  be  prepared  to  work together across cultural  and political  divides to overcome the  many challenging  obstacles to sustainability.

A commitment  to sustainability  translates  into  a clear set of socio• economic  priorities  and  constraints  that  differ  markedly  from  the consumption-and-growth-at-all-costs   assumptions  of  conventional free-market  economics.  Decent  housing and healthy food  must  be available  to  all.  High standards  of environmental  protection  should guarantee  unpolluted   air  and  water  and  the  opportunity   to  enjoy access to an unspoilt natural environment.  Everyone  should  be able to find  a useful and fulfilling  occupation without facing exploitation at work   or   having  to   sacrifice   contact   with   family   and   friends. Redistributive   measures  should  be  employed  to  reduce  divisive inequalities,   provide a safety net against poverty and ensure a good standard   of   education   and   healthcare.    Fiscal   and   regulatory frameworks   should   systematically  favour  environmentally  benign forms of production  and consumption.

From   a  Green  perspective,   Britain  should   only  join   the   single currency  if membership  would  make it  easier for  us to  meet  these priorities and constraints.  The Green Party’s view is that  it would  not and that  Britain  will  be  better  able  to  establish  a truly  sustainable economy  outside the  Euro. This conclusion  stems  from  three  main features  of  EMU:  the first  is the  size and diversity  of  Euroland;  the second is the monetary policy  of the European  Central  Bank (ECB); and the third is the undemocratic  nature of the EMU  project. We will examine  these  features   in  detail  in  later  sections   of this   booklet,   but in  our  view,  they   each  reflect   the  fact  the  entire  project   has  been moulded     to   fit   the    corporate      agenda.     It   suits    multinational corporations   to  have  a uniform   market  with  a single  currency   over  as large  an  area  as  possible,   regardless   of  the  natural  diversity   of  that area.  They  like  nothing   better   than   a  rigid   monetarist   environment with  maximum   price  stability,   come  what  may,  enforced   by a central bank  that   is  beyond   all  democratic    control.   And   if  this   requires   a smokescreen   of  misplaced    and  almost   unquestionable    integrationist idealism  to  dupe  the  people   into  accepting   it,  so  be  it.

In   EMU  we   are  witnessing    nothing   other   than   the  creation   of  the European   branch   of  the  globalised   economy,   yet  the  economics    of globalisation   are far  removed  from  the  economics    of  sustainability.

SECTION  TWO:  A GREEN  CRITIQUE OF GLOBALISATION

There   is   overwhelming   evidence   that   economic   globalisation    is responsible     both     for    growing    social     inequalities     and    for unprecedented   enyironmental    damage.   For   example,    UNCTAD’s

1997  Trade and  Development   Report concludes that globalisation   in its  current  form   is  responsible·  for  a  dramatic   increase   in  global inequality.   In 1965, the average personal  income  in  G7 countries was

20 times that in the seven poorest countries  in the world.  By 1995,  the difference  had  become  39  times  greater.   Income  inequalities   and polarisation  are also growing within  countries,  with the  income of the top  20  per cent  of the population  in  most  nations  having  increased significantly   and  disproportionately  since  the  early  1980s.      At  the same   time,    contrary  to  the   claims   of   some   that   globalisation automatically   leads  to  poverty  reduction,  the  1990s   ended  with  70 million   more  people  in  the  developing   world   (excluding   China)   in poverty than  at the start of the decade.

Meanwhile,  the failure of northern governments to regulate international financial   markets  more  effectively   has  destroyed   livelihoods    on  a massive   scale.   Over   recent   years,   capital   market   liberalisation, assiduously   promoted  by  northern  governments  and  the  IMF,  has brought poverty and instability to a large group of developing countries, many  of which  had  established  a  successful  track-record  in  human development.   The  development  of  global   capital   markets  has  also increased  opportunities for tax evasion,   costing developing  countries billions of dollars.

Free  market   policies   are   also  having  an   adverse   effect   on  the environment.  The need to be ever more globally competitive leadsto the unsustainable  extraction  of  natural  resources.   India’s   export  shrimp industry is a case in point.  Not only has the development  of this industry resulted  in the displacement  of millions   of farmers  and  fishworkers,   it has  also  led  to the  destruction  of mangrove forests, the  depletion  of natural fisheries,  and an  increased salinity  in the  ground  water,  which destroys  both  agricultural   land  and  drinking  water.  In  spite  of  this, however, Indiais being persuaded to increase its emphasis on exports.

At  the  same  time,  globalisation    brings   environmental    legislation    under attack.   For  example,    Deregulation   Now,  a  publication    by  a  group  of German  and  British   business   people  focusing   on the  food,   chemicals and   transport    sectors,    makes   it   clear   that   they   will   oppose    any improvement   in  European   environmental    legislation   beyond  the  lowest common  denominator.   They  state,  “any  overlay of European  standards, over and above existing  International   and national   standards,   should  be resisted,  otherwise   the  competitiveness    of  European   industry  will   be damaged.”   In the  UK alone,  over  600  regulations   have  been  identified for  deregulation   since   1994.  Of these, 129  concern the Department of Environment, and   include   measures  covering   health   and  safety, biotechnology, advertising  in  sensitive areas,  hedgerow preservation, food standards, and energy efficiency .

In  reality,  of  course,  the  obvious  beneficiary of  globalisation   is  the international corporate sector. The growth and power of transnational companies (TNCs) is both enormous and  unprecedented. TNCs now account for about one third of world  output,  and two thirds  of world trade. The  1 O  largest  corporations  together  have a greater turnover than do the 100  smallest countries.  Their  strength  and  mobility have beenfacilitated both by technological advancesand by the progressive withdrawal of investment controls  by governments and  by the World Trade Organisation  (WTO).  By  exploiting   differences   in  social  and environmental standards  between  countries   in  order  to  maximise profits, TNCs are able to create global  production systems over which Governments  have  ever  less  control.  Democracy  in  Europe  is  also further   undermined,   as  global   corporate  giants   disproportionately increase the bargaining powers held by TNCs, and thereby strengthen corporate dominance  in  political decision-making.

At the same time, economic globalisation and deregulation have created a vicious cycle whereby workers, communities and  governments are increasingly forced to compete with one another in a world-wide “race to  the  bottom”  on  wages, taxes,  environmental  protection,  and  any other  factor  that  might   influence  investment decisions.  International competitiveness is  becoming the single  most important  indicator of a society’s  health,  inevitably  leading  to  lower social and  environmental standards.  This,  together  with  the  Increased exploitation  of  natural resources  and the  massive  amounts  of energy  used to  shift goods  from one   end   of   the   world    to   the   other,    ensures   that   corporate-led globalisation  is both  socially  and  environmentally   unsustainable.

EMU  accelerates globalisationprocess

Overthe past 1 O years, EU liberalisation, deregulationand privatisation policies have facilitated the waves of mergersand acquisitions, which have  resulted  in  even  greater  corporate  concentration.  EMU,  by promoting greater internationalcompetitiveness, is likely to encourage this  trend  yet  further. The  1997 record of  US $384  billion spent  in Europeanmergers –  an increase of almost 50 per cent in one year – was exceeded by even higher levels and an unprecedentednumber of cross-border mergers in 1998.These mergers are instigated by Single Market  competition,  which  grows  increasingly  more  fierce  as  the remainingbarriers to trade are dismantled one by one.

The banking and insurance sectors have been particularly hard hit, as companies search for  larger markets, advantages of  scale,  cuts  in costs and higher  profit  margins.  The recent take-over of the  Belgian bank BBL by the Dutch-based ING Group,  and the merger of Zurich and BAT, two large insurancecompanies,  are simply  among the latest examples. The price for this  is expected to  be tens of thousands of jobs,  together  with  the  closure of  up  to  half  of  the  166,000 bank branches in the  EU. The financial services sector  is not alone: some analysts  suggest  that  the   new  wave  of · mergers  and  corporate downsizing in Europe as a result of the single currency could lead to one  out  of  every twenty  industrial workers becoming  unemployed. Moreover, the  more geographically specialised Europe  becomes, the greaterthe likelihood  of asymmetric shocks and the less appropriate a common interest rate is likely to be.

At the sametime, companies that previouslyorganisedtheir operations at  individual  country   level   are  now   increasingly  operating  on  a Europeanlevel. The single currency promotesthis process by removing the final barriers in the Single  Market, such as currency fluctuations. As a result, pan-European companies have huge advantages over smaller companies   producing   for  local  markets,  since   EMU  eliminates expenses  across  Europe  and  leads to  economies  of scale.  In  1995,  for example,  the US-based  sportswear  producer   Reebok  International   had 14  distribution   warehouses   for  its  European   market;  three  years  later, only  10  were  left.  By  1  January  1999,   when  the  Euro was  introduced,   a single   distribution    centre  remained.   This  trend   leads   both  to  massive job  cuts,  and  to  a significant   increase  in  the  environmentally    damaging long-distance   transport’  of goods.

Monetary    union   is   also   likely   to   result   in  ever-fiercer   cross-border competition.    The  Euro   makes  the  instant   comparison    of  prices   and productivity   within  the whole  of  Euroland  possible,  increasing  the  trend of  relocations   to  the  most  competitive   areas,   and  exacerbating    the competition   between  countries   and  regions  to attract  investments.   As a Morgan  Stanley  economist   has remarked,  “If  you  remove  currency  as a safety  valve,  governments   will  be forced  to focus  on real changes   to become  more  competitive:   lower  taxes,  labour  market  flexibility,   and  a more   favourable    regulatory     backdrop    for   business.”     Under    this scenario,   the  future  for  progressive   policies  like  ecological   tax  reform, together  with  other  measures  to  protect  people  and  the  environment, looks  bleak  indeed.

Whence  globalisation?

This process of economic globalisation  has not happened by accident. It has been driven over the past three decades by the world’s  leading business   elites,   who   share  common   aims,   including   economic integration, deregulation,  and  an economic  philosophy  based on free trade and  international competitiveness. They  have lobbied  for  free trade agreementsincluding the GATI Uruguay Round (spearheadedby the  International  Chamber  of  Commerce), the  North  American  Free Trade Agreement(NAFTA, promotedby the US Business Roundtable of TNCs togetherwith Canada’s equivalent Business Council on National Issues),  and  here in the  EU,  the  European Single  Market and  Single Currency (led by the EuropeanRoundtable of Industrialists, ERl).

Indeed,   the  ERT  has  been  one  of  the  main  political  forces  in  the European  Union  for  over  a  decade.  Its  unprecedented  access  to decision  makers at  both  European  and  national  levels  has  given  it enormous   influence   over  the  EU’s  political   agenda,   and  ensured   that policies   are  Increasingly    introduced   which  favour  the  agenda  of  large corporations   and  promote  economic   globalisation.

Founded   in  1983,  it  consists   of  around  45  highly   influential   heads  of industry   from   European    multinational    companies,    with   a  combined turnover  approaching   £400  billion.  Its  explicit   aim  is to  change  the  way that   Europe   is   managed;    as   former   ERT  Secretary-General    Keith Richardson  put  it,  “industry   is entitled  to a system that delivers results: an EU which functions like an integrated economic system with a single centre of overall decision making”.

The  ERT: an early advocate of the Single  Currency

The ERT, ever anxious to increase international competitiveness,  was an early and vocal advocate of European Monetary Union. “Japan has one currency. The US has one currency.How can the Community  live with  twelve?”  it  asked  in  1991.  A few years earlier  it  had  set  up a separate body, the Paris-based Association for the Monetary Union of Europe (AMUE), to take forward its agenda on  EMU. Its influence  has been significant, as former Commission  PresidentJacques Santer has gratefully  acknowledged.  Addressing  an  AMUE  board  of  directors meeting in 1998,  he said,  “The members of the Association have been a major driving force behind the EMU project. Many of your companies have played a leadership role by clearly advocating the advantages of the single currency for the private sector and society as a whole”.

The AMUE claims to have organised over one thousand conferences and seminars to promote the single  currency,  involving  officials  from the Commission and from national  states.  It also  has 3 seats on a 12 seat “independent”  expert committee on the introduction  of the Euro, set up, on AMUE advice, by the Commission.  The committee’s work was instrumental in securing the European Council  decision  to launch a speedy  introduction of  EMU  at the December 1995  EU Summit in Madrid.  The AMUE is also often chosen by both the  Commission and the  European Parliament  for  public  tenders  requiring  expertise  in monetary matters –  indeed,  the Commission  frequently consults the group  on monetary  questions,   both  formally  and  informally.   “It’s  a very confident    way   of   working”,    explains    AMUE   Secretary-General    de Maigret.  ‘They  call  us,  we  call them,  they  see us,  we  discuss  matters. They  are  quite  flexible.”

For  the  AMUE,  EMU  is  a  logical  step  towards  the  completion   of  the Single  Market,  which   is- still   not  as  “efficient”   as  industry  would   like. According   to  de  Maigret,   EMU  will  bring  “monetary  stability  and  long• term   certainty,   which   will   increase   productive    investment,    generate economies   of  scale  and  eliminate   production   costs,   which  in  turn  will increase  competitiveness,   sales,  economic  growth  and  employment”. Significantly,   he  says   nothing    about   other   euro-zone   realities     in particular    the   widespread    social    and    economic    upheaval    across Europe, which   EMU  has already  caused.

AMUE,   of  course,   is  not   alone.   Alongside    it,   UNICE   (the  Union   of Industrial  and  Employers’   Confederations   of Europe)  and AmCham  (the EU  Committee  of the American  Chamber  of Commerce)  share a similar approach.   As  AmCham’s   Manager  for  European  Affairs,  John  Russell explains:  “We exchange   a  lot  of  information,    have  joint  meetings   and even  publish  joint   papers”.   These  three  corporate   groups   use  what Russell calls the “choir  approach”,   echoing  and  reinforcing  each  other’s positions:   “It  is normally  more  effective   not  to  say everything  together, but  to  have  different   people  telling  the  institutions    more  or  less  the same  thing.”   Since  the  single   currency   was   introduced,    UNICE   has been  calling   for  structural    reforms   and   flexible   markets   so  that   its “benefits”   can  be  reaped   most  efficiently.    The   reforms   are  meant  to achieve  a  permanent   reduction   in  public  spending,    “particularly    in the areas    of   public    consumption,     pension    provision   and   health   care, welfare   benefits   and  state   subsidies”.    UNICE’s   views   on  the  single currency  are uncompromising:    “Try to  favour  business,   that’s  the  point. This  is a clear  follow-up   of the  EMU.”

Favouring   business   and   favouring   employment    are   not   always   the same  thing,   however    and  while   EMU  is certainly   about  the former,  its interest  in the  second   is small.

In whose interest?

With  such  parentage it  comes  as no  surprise that  one  of the  main economic  arguments  supporters of  EMU  advance  is that  the  Euro would reduce costs and uncertainty for industry  and would therefore boost internationaltrade. Businessesinthe EUhaveto allow for foreign exchange  transactions  and  fluctuations  in   exchange  rates.  These currency exchange costs amount to only about 0.1 % of GDP but they would be eliminated. Similarly,  though of marginal benefit in the scale of things, individual ‘Eurocitizens’ would be relieved of the exchange commissions  they  pay  when  travelling  between  member  states. Governments’  economic   planning  would   be  simplified   by  stable currency markets and an end to the threat of competitive devaluation by fellow memberstates. Greater price and wagetransparency across borders would, they claim, also helpto ensurethe efficient allocation of goods, labour and resources and control inflation.

Economists  are  divided  on  whether  or  not  these  benefits  would outweigh the economic costs  of joining the single currency. For  the reasons outlined  below,  we  believe  that  they  would  not,  even  in conventional economic.terms,   But further still, joining the  Euro would prevent Britain  from  moving beyond conventional economics to the economics of sustainability.

 SECTION   THREE:  EMU    TOO  BIG, TOO  RIGID, TOO  LllTLE  DEMOCRACY

Will  the Euro  fit  Euroland?

What  is an  optimal currency area?

One of the requirements  of Green economics  is that  economic  policy decisions   should    be  as  sensitive   as   possible   to   local   social, environmental    and   economic    conditions.    Since   certain    key instruments  of economic  control,   such as interest  rates, cannot  be varied  between  different  parts  of  a  single  currency  area,  it  will  be hard to  gear  economic  policy  to  local  conditions  in a very  diverse currency  area.  Decisions  will necessarily  be inappropriate  for some of its  regions.

For example,  if  a central  bank were to  set  base  interest  rates at a relatively  high  level in  order  to  dampen  inflationary  pressures  in the prosperous regions  of its currency area,  this  would worsen recession

in  the more deprived  regions.  Conversely,  if the central bank were to lower  interest rates to  meet the needs of these poorer  regions,   the economy  in the prosperous regions  might overheat. This would  have undesirable     local    effects     such     as    increased     congestion, environmental  pressures and rapidly rising house prices.  It might also feed  inflationary  pressures throughout  the currency area. This would, in  turn,  undermine the  effectiveness   of the  original  attempts  to the help   the  poorer  regions.   Clearly,   the  larger  and  more  diverse   a currency area is, the harder it will  be for its central bank to set interest rates at a level to suit the  entire  area.

Indeed,  a question that has been much debated since the Nobel Prize winner,  Robert  Mundell  published  his  seminal  work on the subject  in

1961,  is:  what  constitutes  an  ‘optimal   currency  area’?  Economists agree that  a  currency  area  is  optimal   when  any  economic  shock impacts on it symmetrically,  or at least not so asymmetrically  that any part of the  area  requires  additional  demand  management  to  help  it absorb the shock.

This definition  does  not  require the  regions of an optimal  currency area  to   be  completely   homogenous  as  there  are,   according  to orthodox  economic  theory,  a number of mechanisms that  increase their cohesion  and help  them to react similarly to economic shocks.

Chief amongst such mechanisms  are labour  and capital  mobility.  In other   words,   according   to   the  theory;   unemployed   workers   in depressed  regions  are  expected   to   relocate   to   any  prosperous regions that are experiencing labour shortages,  the Tebbitt school of “on  your  bike”  economics.  Conversely  investors  will,  theoretically, find  greater returns  in  depressed  regions  where there  is  a  pool  of readily available and presumably cheap labour,  and lesser returns in prosperous regions  where the  factors of production  are more scarce and expensive. If the point is reached where enough new investment has occurred in the depressed areas to allow the remaining workers to stay put and get a new job  locally then  equilibrium will  have been re-established  within  the  currency  area.  Failing  that  the  different regions  should   specialise,  the   poorer   ones   in   labour  intensive activities, the  richer  ones  in  capital  intensive  production,  and  trade with  each other to even out the imbalances.  If equilibrium is still not achieved  then  the  government  of  the  currency  area  can  always bolster flagging  regions with  some regional aid  and fiscal  transfers from wealthier  regions.

There are problems  with  the theory.  For instance,  left to  their  own devices,  investors tend to favour centres of market buoyancy, rather than depressed areas.  Similarly,  the migration  of workers away from a depressed area tends to accelerate the downward  spiral  of market contraction and recession, rather than opening new opportunities for the   people   who   are   left   behind.    Together,  these   factors   will exacerbate  rather than  reduce  regional   disparities,   thus  increasing the need for redistribution between regions  before the currency  area can be considered  optimal.

ls Euroland  an  optimal currency area?

In the  decades  running  up to  EMU,  the  EU devoted much energy to increasing  the mobility of capital and labour and removing barriers to trade  within  the  single  market.   It  has  also  established   a  programme of  regional   assistance   aimed   at  reducing   the  economic    disparities between  different  areas.  A  number   of  economic   convergence   criteria were  set  up  that  were  to  be  fulfilled   by  member   states  adopting   the Euro.  All  these   measures   were   aimed   at  reducing    the   economic disparities   between   the  different    regions   of  the   EU,   but   have  they succeeded?   Is Euroland  an  optimal   currency  area?

Notwithstanding    the  EU’s  strenuous   efforts,  the  countries of the  EU and  Euroland  are  economically,   culturally,   environmentally   and socially very diverse. For example, in 1997, GDP per head in the EU’s richest  cities   was  five  times  that   in  the   poorest   rural  regions. Unemployment levels in the worst hit regions of Spain were 10 times higher  than   in  the   more  prosperous  areas  of  Austria  and  the Netherlands.  The  cultural  and  environmental  capacity  for  further economic growth  in  traditional  agrarian  areas is very different from that in more industrialised  regions.

Additionally, there are ties, such  as language and family, which quite naturally make people reluctant to relocate between different regions of the  EU. Even the  EU’s regional aid  policies  and  fiscal transfers between regions that  are  deliberately  intended  to  reduce  regional disparities within  the EU are far smaller in proportion to the extent of these EU-wide regional disparities than are the equivalent domestic measures are within  most  member states. They are also far smaller than the counterpart measures in the US dollar currency area.

Professor Tony  Thirwall   has  reviewed  the  evidence   of   regional disparities  in  the  EU.  He  finds  little  clear  evidence  of  economic convergenceover time. Per capital  incomes in the poorer regions and countries have caught up with those of the richer areas at an average rate of 2% pa between 1950 and 2000, but that rate was faster in the

1950s,  1960s   and   1970s  than   in  the   1980s  and   1990s.  The productivity gap between rich  and poor  regions has converged at a slightly faster rate, but this has been at the expense of growing levels of unemployment  in the poorer regions. Disparities  in unemployment levelsappear to be remarkably stubborn.  From the early 1980s they haveshown a pro-cyclical  pattern, increasing  during recessions and narrowing  during   booms.  However,  they  also   show  a  slight  but noticeable underlying upward trend.

Overall, research shows that  regional disparities  in  living  standards and  unemployment  across  Europe  depend   largely  on  the  relative performance of individual countries.  In other words the relative fate of regions  is  predominantly  tied  to  the  performance  of  their  national economy rather than to EU-wide economic  trends.

Thirwall concludes,  “I know no one who believes the current eleven countries of Euroland  constitute  an optimum currency area”. We are not about to challenge that consensus.

Regional  disparitiesunder the Euro

If Euroland is not an optimal  currency area, economic  shocks will be felt asymmetrically by its constituent countries and regions. This was illustrated   most   graphically   in   1992  by  the   impact   of   German reunification  on  the  forerunner  of  the   Euro,  the   exchange   rate mechanism  (ERM).  The  ERM tried  to  keep  participating  currencies within  a  narrow  band of exchange rate fluctuations, as a first  step towards    merging   them    into   a   single   currency.   The   British Government’s ultimately unsuccessful attempts to keep the  pound’s value  within  the  correct  band  after  German  reunification  severely distorted  domestic  economic  planning.  The government lost £18bn of  currency  reserves,   one  million   jobs  were  lost  and  1.75  million homeowners  were   pushed   into   negative   equity.   Since   Britain’s unceremonious  ejection from the  ERM,  inflation  has fallen  and whilst unemployment  on  the  continent  has  continued  to  rise,  in  Britain  it has  halved.

If the  ERM  limited the control  governments had  over interest rates, inflation targets and hence exchange  rates,  membership of the Euro strips them of lt completely.  Policy becomes “one size fits all” and is driven  centrally  by the  ECB. Yet as the  ERM fiasco  demonstrated, economically   divergent   countries   react   differently   to   economic shocks,  and revaluing  their  currencies  against  each  other  is  a vitally important  way  of  avoiding  the  balance  of  payments  problems  that this   would   otherwise    generate.    Under   the  Euro,    countries    lose  the safety  valve  of  currency   revaluation   and  without   other  compensating mechanisms    such    as  a  strong   EU   regional    policy   or  inter-regional fiscal   transfers,   economic    shocks   will  increase   regional    disparities.

As  we  shall   see,   this   is  a  dangerous    conclusion,     not  _only   for  the current   policies,    institutions    and  aspirations     of  the   EU,   but  also   for any  prospect   of  building   a  more  sustainable    future  in  Europe.

EMU: Deflationary monetarism writ large

Even  if it were not the case that Euroland  is too large and too  diverse for a single currency to operate efficiently withln  its borders, we would still   be  concerned  by the  unnecessarlly  strict  and  narrow  form  of monetarism  that  is  enforced  by  EMU.   All  the  rules   imposed  on participating  countries aim to control  inflation tightly by restricting the supply  of money.  Little or no attention  is paid  to the wider economic consequences   of  this  such  as  the  effect  on  employment   or  the environment.

The preconditions  for membership of the Euro were established in the Maastricht   Treaty.   To   qualify   member  states   had   to   meet   four economic  convergence criteria. These were:

    a rate of inflation  no more than  1.5%  above the  average of the three member  states with the most stable prices;

    a budget  deficit  not  greater than  3%  of GDP and  public  debt  not more than  60% of GDP;

    long-term  interest rates not more than  2%  above the average of the three best performing  member  states in  terms of price stability;  and

    two year’s participation   in  the ERM.

The years leading  up to the  introduction   of the Euro on  1st  January 1999   were  characterised   by  governments’   attempts  to  cut  their budget deficits in order to qualify for membership.  During these years unemployment  in the EU began to approach 20 million.  Nevertheless, when  the  time  came,  Italy  and  Belgium  were  permitted  to  join the Euro, despite the fact that their debts exceededthe limit of 60% of GDP.

The Maastricht  Treaty was also responsible  for guaranteeing the ECB complete  independence  from  political  intervention in  performing  its overriding  task of keeping a tight  limit  on  inflation.

The  final   piece   in   EMU’s   monetarist  jigsaw  is  the  Stability   Pact, agreed  at the Dublin Summit of 1996;  This commits  members  of the Euro to  set  budget  deficits  no  greater than  3%  of GDP in  any  one year,   with  the   medium   term   aim  of  balancing   their  budgets.   A government   that   exceeds   this  limit   wiil   be  subject   to   financial penalties  if it  does  not take corrective  action  and is  not  specifically exempted  by  a two-thirds  voting  majority  of the  EMU members  of ECOFIN.The penalties  take the form of a fine of 0.2%  of GDP plus 0.1  % of GDPfor every 1 % of GDP the budget deficit exceeds the 3% limit, up to a maximum  of 0.5%  of GDP.

The combined effect of these  measures has significantly  coloured the economic environment of Western Europe.  The ECB’s priority is to set interest  rates at levels that  ensure that inflation stays below  its target of  2%.   Public  spending  and  government  borrowing  are  limited  in order to  restrict  the  money  supply.  This  is the  case even  in the  EU member  states  outside  the  Euro-zone  who  are  nevertheless  still required to comply with  the  rules of EMU.

A   prominent  critic   of   the   strictures   this   places   upon   national governments   was   the   former   German   finance   minister   Oskar Lafontaine.   He was swiftly  removed  from  post  after arguing  that  the German  government  should  adopt  a  more  reflationary  approach  to address  the  growing   problem   of  unemployment.    In   many  ways, Lafontaine’s  departure  marked  a symbolic  victory  for  the  ECB over national   governments.     It   also   confirmed    the   new   deflationary monetarist  orthodoxy that” surrounds the Euro.

Democracy under EMU

With the introduction  of the Euro,control of interest rates passed from the  member  states’  central   banks  to  the  ECB. Inflation  targets  are pursued  by the  ECB and the  exchange  rate strategy  for  the  single currency  is determined  by the  EMU finance  ministers   of ECOFIN in consultation    with  the  ECB.   Domestic   fiscal   policy   is  constrained    by the  need  to  meet  the  conditions    of  the  Stability   Pact.  In  short,   much of the  economic   sovereignty   of  member  states  of  Euroland  has  been pooled   and  handed   over  to  European   institutions,    primarily  the  ECB.

Of  course,   in   a  true   democracy    the  various   electorates    of  the   EU would   be free  to  pool  their  sovereignty   as they  wish  and  to  hand  it to the  institutions    of  their  choice.   However,   two·  major  questions    hang over  the  democratic   credentials   of  the  EMU  project.

The  first  relates  to the  ECB  itself.   It is  guaranteed   far greater  freedom from  political   intervention    than  any  of the  central  banks  of  the  Euro’s member  states  enjoyed.   This contrasts   with  the  situation   in Britain   for example,   where  even  the  newly  ‘independent’    Bank  of  England  works to  government-determined      inflation   targets.   Allowing   for  differences in  the  way  the  inflation  index  is calculated   in  Britain   and  Euroland,    the Bank  of  England’s   inflation   targets  are currently   as tight  as the  ECB’s. However,   they  can  be  varied  to  suit  wider  economic   conditions    and the  Bank  of  England  could  even  see  its  independence    removed   by  a future  government.    Nothing   short  of  a revision  of  the Treaty  of  Rome would  be necessary  to  change  the  relationship   between  the  ECB  and political   institutions   of the  EU.

The  powerful   and  independent    position  enjoyed   by the  ECB  does  not rest  on   a  democratic    mandate.    A  committee    of  six  runs   the   ECB, including    the  president   and  vice-president.    They   are  unelected    and unaccountable    to  the  voters.   In   effect,   it  is  these   people   who   have their   hands    on   the   principal    economic    levers   of   Euroland.    They position    those   levers   to   meet   the   tight   monetarist    criteria    of   the Maastricht   Treaty  almost  without   regard  to the  level  of unemployment or of mortgage   repayments   in  Euroland.   This  situation   falls  a long way short   of  our  definition    of  true  democracy.

EMU’s   second   area  of  democratic   deficit   concerns   the  process   that brought   the  Euro  about.   EMU  has  always  been  as much,   if not  more, of a political   rather  than  an economic   project.   Rarely   have  the  people of  the  EU  member   states  had  the  opportunity    to  decide   whether   to accept   EMU  without   the  wider   issues  of  political   integration   coming into play. Forinstance, the Maastricht Treaty was subject to referenda in a number  of member  states.  It set the ground  rules  for EMU but  it also  dealt   with   several   other   important   issues.    It   is   therefore impossible  to   interpret   the   half-hearted    backing  that  the  treaty received in those referenda  as a firm endorsement of EMU.  Indeed, public  opinion  throughout   the  EU  remains   sceptical   of  the  single currency  and  the  EU  cannot claim  to have demonstrated  that  EMU has the democratic  support of the people.   ·

Sustainability  and  the single currency

Earlier we defined  the economics  of sustainability  as a system that: delivers  decent  housing   and   healthy  food  to  all;  maintains   high standards  of  environmental   protection;   and  provides  a  useful  and fulfilling occupation  for  everyone without  being exploited   at work or sacrificing   contact  with   family   and  friends.   Fiscal  and  regulatory measures would  reduce inequalities,  eliminate  poverty, ensure a good standard  of education  and healthcare,  and promote  environmentally benign forms of production  and consumption.  If such  a system is to effectively  meet the genuine needs of all members of society,  it would need to  be underpinned  by a locally sensitive,  decentralised system of democratic  control. This  is  not a description  of Britain’s  economy at present. Far less would it be if we joined the Euro.

Big  isnt  best

As  we  have  seen,  the  Euro-zone  is  too  large and  too  diverse  to operate  as an optimal currency zone.  It will  be impossible  for the ECB to  mould   economic   decisions  to  the  local   circumstances   of  the diverse range of areas that will  be affected by them.  Millions  of people will  be  forced  to  live  with  the  consequences   of  having the  wrong interest    rates,   an   inappropriate    balance   between   inflation    and unemployment  and the wrong exchange  rate.

Regional  disparities  will  be exacerbated  and economic  centralisation increased  by the application  of ‘one size fits all’  policies.  Regions will be forced to compete  with each other  across  larger areas and so the basis  of  their  competition  will   move  increasingly   away  from  local comparative   advantages,    more  towards   absolute   advantage.    In  this brave  new  world   many   regions  will  find  that  they   have  no  absolute advantages   and  therefore   no  basis  on which   to  compete.   They  will  in effect  be  consigned   to  dependence    on  regional   aid  handouts.   They will    become    pockets    of   deprivation     and    unemployment.     Their economic   difficulties   are likely  to  be  matched   by a sense  of alienation and  despair  as  more  people  are forced  to  live  on  benefits,   opt  out  of the  formal  economy,   or  move  away  to find  work.

The   converse    will   also   be   true.    Successful     regions   will   tend   to become   more  successful.    The   danger    is  that  their   economies    will over-heat,   with  all  the  attendant   social   and  environmental    problems that   brings:   pressure  on  schools   and  hospitals,    more  pollution   and congestion,      spiralling     house    prices,     pressure    for    more    built development   and  new  roads.

The  north/south   divide  in  the  Pound’s   currency  area already  provides an  illustration   of this  problem,   and  perhaps  an  argument  for  stronger regional  policy  or  even  regional  currencies    in  Britain.  But  neither   the ‘north’   nor  the  ‘south’   provides   a  good   model   of  the  economics    of sustainability;   still   less  would  they  under  the  Euro.

The  large  size  of  the  Euro-zone   is  also  widely   expected   to  increase the  mobility   of  investment   decisions.   This  will   lead to  more  mergers, acquisitions   and  restructuring.    For this  we can  read  the  loss  of  more jobs  and  the closure  of more  smaller,   locally-owned    businesses,    ones that  are  responsive   to  local  needs  and  rooted  in their  community.   As a result,  economic    power  will  be further  concentrated     in  the  hands  of the  multinationals  that  are  already  big  enough  to  compete  on  a European  scale. Their  ability to  force  governments   and  the  EU to lower  corporate  taxes  and  standards  of  social  and  environmental regulation, for fear of losing  inward investment,  will   be increased.

Never mind the size, feel the policy

Regardless of the size of a currency area, the government and central bank are still presented with a range of economic  policy options.  The EU has chosen to fetter its discretion  in this area by enshrining in the Treaty a tighter version of monetarism than most member states have ever sustained.

Both during the pre-Euro  convergence   period  and continuing   under the   Stability    Pact,   the   monetarist    zeal   of   EMU   has   forced governments  to  cut  public  spending   and  borrowing.  The squeeze has  been felt  throughout  the  European public  sector  with  cuts  to health,  education,    housing  and welfare budgets.   This  has  been  the case   even   in   Britain,    where    despite · opting   out   of  ·the    Euro, successive  governments   have  taken  pains  to  meet  the  Maastricht convergence  criteria.  Cuts to  public  services  have  been so  severe that  Social  Services  authorities,  even  in  prosperous  areas such  as Oxfordshire  for  example,  have  struggled  and  often  failed  to  meet their  statutory   responsibilities   to   some   of   the   most   vulnerable members  of society.

One British  social  campaign  group that has recognised  the true costs of  the  pressures to  reduce  borrowing  and  budget  deficits   is  the London  Health Emergency  group.  It  has launched  a scathing  attack on the Government’s   love affair with Private Finance Initiatives (PFls}. PFls  enable  private  sector  companies  to  design,  build and  operate public   sector   facilities,   like   hospitals,    for   profit,   allowing   public expenditure to  be limited  today,  but ensuring that far greater funds accrue to the  private sector tomorrow.  They conclude,

“The only appeal (of the PFI) for the government  is that the cost of the hospital  does  not appear  as an  immediate  lump sum  in  the public expenditure   figures.   Capital  advanced  by the private sector  as a PFI transaction  is not counted as public sector  “borrowing”  requirement, although   the  hospitals   will  effectively   be  paying  off · a  high-cost mortgage for decades  to come. This enables  the government to stick within  the  single   currency  straight  jacket…The cheaper  alternative, building  hospitals  with  public  money  financed  through   government borrowing,  is ruled  out by the Maastricht criteria.”

This  monetarist  regime  will  continue under  the single  currency  and any  country that  is  interested  in  a sustainable  future would  be better advised  to  stay,  or  opt,  out  of  it.  Many  environmental   and  social improvements    will    require   substantial    investment   to   fund   the transition  towards  a  more  sustainable   society.    Examples  include farmers’   conversion   costs   in  shifting   from  chemical    to   organic agriculture;    investing     in   decent   public    transport    and   energy conservation  to reduce C02  emissions; and providing  the benefits  to enable  new  parents  to  spend  more time  with  their  children  so  that damaging   and  expensive  social  problems  are  avoided  later   on.  A great deal  of this transitional   investment  will  have  to come  from  the public  purse,  funded by taxation or through  borrowing.   EMU   makes such  investment  less likely.

Similarly,   systematic   ecological   reform  of  the  taxation   system   is required  if  the  maximum  use  is  to  be  made of  fiscal  measures  to protect the  environment.  A start has been made at the  EU  level  and in  some member states,  but  progress is likely  to be slower  given the restricted  fiscal  discretion   permitted   to  governments  under  EMU. The  same  is  true  for  moves  towards  more progressive  regimes  of personal  taxation,   which   are  also  an   essential   component   of   a sustainable  society.

A   final    consequence    of   the   ECB’s    monetary    policy    is   the deflationary  bias that is introduced  by the 2%  inflation  target.  Partly because  of  this  unbalanced   approach  to   inflation   there  are  20 million   people   without   work   in  the   EU,   although   this  figure   is currently   reducing.  There  are  also  many  job-rich   and  sustainable industries    such   as   recycling,     energy   conservation,      organic agriculture,   forestry  and  public   transport   that  could,   with   some public  investment,   provide  useful  work  that  needs to  be done.   As the  EU  expands  to  the  east  the  case  for  this  new  type  of  Green Keynesianism   will   become  ever  stronger    even  at  the  expense some inflationary  pressure.

Bill  Morris,   leader  of  the  Transport  and  General   Workers  Union, summed   up  these  effects  of  EMU   well  when  he wrote  that,   “[the single   currency will]  enthrone  the dogma of  laissez-faire  economics ever  more  securely  in  Europe.  If the experience  of the  last  15  to  20 years world-wide  has proved anything,  it is that the free market is not the road to full employment.”

Power to the bankers!

If the people of the  Euro-zone  had chosen to adopt  the institutions and policies of EMU and if they had the ability  to change them when they see their effect, there would  be more hope for  Europe’s future. But the  Maastricht  Treaty was negotiated  in  utmost  secrecy. It  has become a parable  of a political elite losing touch  with the  people. It also puts the  ECB beyond  any democratic  control and  contains no provision for a country to leave the single currency. This fundamental democratic  deficit  at  the  heart  of  EMU compounds  the  problems outlined above.

Indeed, EMU confronts the people of the EU with the powerlessness of  their  elected  governments.  Over  time  this  can  only  stoke  up resentment against the  EU  institutions  and further  undermine their democratic credibility. There is a danger that it will breed resentment between member states, as some are seen to prosper at the expense of others. This would  unpick many of the hard won benefits that the EU has brought and generate a fertile climate for dangerous forces of Europeandisintegration and nationalism.

After,  and partly because of,  the centuries of European conflict  that culminated  in  the  Second World War,  very few  people do  not  now profess   the   ideals   of   European  internationalism   and   common progress. Supporters  of  a  single  currency  claim  that  the  Euro will further those ideals,  but the very opposite is likely to be the case. The real  internationalists  are  those  of  us  who  reject  the  flawed   and dangerously narrow self-interest of EMU.  Instead we look to a wider role  tor  the  European family   of  nations    one  that  furthers  social and   environmental   justice   and   democracy   throughout   Europe, and beyond.

SECTION   FOUR:  A GREEN  ALTERNATIVE

In order to createa Europethat has social and environmentaljustice at the heart of both its  domestic and international policies,  Greens believe that  we  need a  different goal for  the  region’s  economic structure. At  present all  political  parties  except  the  Green Party subscribe to the idea that the purpose of a nationaleconomy is first and  foremost  to   be  internationally  competitive  within   a  global market. Achieving this  goal  is  supposed to  provide the  levels of economic  growth  that  will   then  make  social  and  environmental improvements possible.   They ignore the  fact  that  this  has never worked  for  the  majority  of  poor  people.  Indeed,   the  insecurity inherent in today’s globalised economy is adversely affecting even the more comfortable sections of society in  industrialised countries. Increasing job   insecurity,   social  problems,   crime  and,  in   some countries,    the   growth   of   racist   right    wing    movements,   is creating a  growing  realisation  that  globalisation is  making these problemsworse.

Greensbelieve that a more socially just and sustainablealternative would be a set of mutually reinforcingpolicies, which  have,as their goal,  stronger   and  more  diverse   local  economies,  with   high environmental, social  and  democratic  standards. These  policies are  not  just  for  Europe,  but  for  all  regions   of  the  world  and, accordlngly,these policies are referredto as aiming  to “protect the local, globally”.

Michael  Shuman  of  the  Washington-based  Institute  for   Policy Studies,  in  his groundbreaking book Going Local, describesthe aim of the localisation process as one that:

” …does not mean walling off the outside world. It means nurturing locally  owned  businesses which  use local  resources  sustainably, employ local  workers at  decent wages,  and  serve  primarily  local consumers.  It   means  becoming   more  self   sufficient   and   less dependent  on  imports.  Control  moves  from  the  boardrooms  of distant corporations and back to the community where it belongs.”

The essence of this approach is to enable people, local governments and  communities  to  reclaim  control  over their  local  economies;  to make  them  as  diverse  as  possible;   and  to  rebuild  stability   into community  life. This does  not  mean a return to overpowering  state control;  merely that  governments  provide  the  policy  framework  to allow the re-diversification  of local economies.  Over time, we would gradually move from a situation  in which  all economies are trying to compete  with  each  other  to  one  in  which  goods  and  services  are provided locally wherever feasible  and appropriate.

Key  components   of   this   policy   approach   include   controls   on multinational  companies.   These  would  include  tighter  social  and environmental regulation, greater obligations  to ensure transparency, new competition laws to limit the proportion of market share held  by any one company,  and domestic  or regional  “site  here to sell here” policies for  manufacturing  and  services  as appropriate.  Import  and export  controls would  allow for the introduction  of resource taxation and   the   protection   of   higher   standards   in   key   industries,   as necessary. They  would   also  encourage  more  local  and  regional production  patterns.

Europe-wide  re-regulation  of  finance  capital  is  also  needed.  This includes controls  on capital flows,  taxes on short-term  speculative transactions,    tighter    controls   on   “easy   credit”   which   allows speculators to multiply  their “bets”  way beyond the cash required to cover   them,   as  well   as  a  co-ordinated   Europe-wide   attack   on corporate  tax evasion,  including   offshore banking centres.

At  the   local  level  this   should   be  complemented   by  support   for smaller,   locally   based   banks,   credit    unions   and   local   trading schemes.   These   help   to   retain  wealth   and   exchange   within   a community,   promote  local  employment   and  training  opportunities, and build a stronger community  structure.

International  aid and trade  policies  must  be geared to strengthening local  economies  globally.   We  believe  that  any  serious  attempt  to tackle    international    poverty   must,   as   its   starting   point,    reject globalisation  and revive and update the concept of more self-reliance rather    than    ever    more    market     reliance.      In    promoting      local economies,    these   policies   will   create   useful   work   for   people,   and strengthen    local   cultures,   communities,      and   identity.    They   would allow   a   more   co-operative    relationship    with    other   countries    and regions,     and    give    us   our    best    hope    of   achieving     genuinely sustainable   global  development.

Such  radical  proposals   are crucial   to  reverse  the  present   destructive trend  of  centralising   power   in  Brussels.   This  undermines   democracy and  gives  corporate   interests   an enormous   advantage   over  the  aims and  aspirations   of  social   and  environmental    movements.

Our   agenda    is   ambitious    and   it   will    need   to   be   implemented gradually.   However,   it   is  gaining    support,    often   from   unexpected quarters.   George  Soros  himself   has said:  “The  collapse   of the  global marketplace      would     be   a   traumatic      event    with    unimaginable consequences.    Yet I find  it easier  to  imagine  than  the  continuation    of the  present   regime.”

CONCLUSION

The debate about the single currency  goes to the heart of the  wider discussion  about  what  kind  of  European  Union  we  want.  We can sign  up  to  an  EU  of  ever   more  open   markets,   dominated   by corporate interests.  Or we can work towards a more  inspiring vision, where the EU takesthe lead on  key issues of peace and democracy; where it  is in  the  vanguard  of  progressive  policies   to  rebuild  local communities  and  to  further  social  justice  and  human  rights;  and where  its  environmental   understanding   and  policy-making   set  an example for the world.

The debate about the Euro ought to  be  an  opportunity  to  consider these ideas, to  re-assess  our vision  of Europe,  and  to discuss  how we will rise to the challenge  of enlarging  to the east and south. The present level of debate represents a tragedy  of lost opportunity, for in  the  shallow  exchanges   between  Europhobes   and  Europhiles, these critical  issues  relating  to the future of the European Union  are never addressed.

At the same time, monetary union  is pushing  the commitment to  EU enlargement  far  lower  down  the  political   agenda,  as  governments grapple   to   make   monetary    union   work   and   move   towards development  of  political   union.   Indeed   the  advent  of  the  single currency has made  enlargement  much harder,  to the  point that,  for many analysts,  the aims of further deepening  the EU and of widening its membership  are becoming  mutually  exclusive.  Eastern European countries preparing to join  the EU are already coming  under intense pressure  to  prepare  for  the  Euro  too,  in  spite  of the  fact  that,  for them,  the business  of convergence  will  be extremely  difficult,   since their   economies   are   at ·a   much   earlier   state  of   development. Moreover,  many   Greens   seriously   doubt   whether   the  terms   of enlargement  currently  on  offer will  genuinely  benefit  the  peoples  of Eastern  Europe    indeed,   the  opposite  is  likely  to  be  the  case. Countries  such as Poland  and the Czech Republic  need sustainable development    and   flexibility,     not   the   deflation   and   Inflexibility enshrined  in the  EMU rulebook  by the Maastricht  Treaty.

The   price    of   ignoring    these   issues   will   be   high.    Growing    soclal inequalities    between     and   within     countries     are   only    likely    to   be exacerbated   by  the  single   currency,   generating   fertile   conditions    for the   rise   of   an   ugly    nationalist      Right,    while     an    ill-thought     out, inadequately    resourced    and  wrongly    focused   enlargement     process will   add   further   political     and   economic     pressures.    The  spread   of what   could   be  termed”   “free   market   fascism”,    promoted    by  an  EU which  continues   to  put  a corporate-led    deregulated,    free-for-all    neo• liberal   agenda    above   social   justice   and   sustainable     development, spells  further   marginalisation     and  exclusion   for  growing   numbers.

This  comes   at  a  time   when   the  EU  already   faces  a  major   crisis   of confidence,     as   the   woefully    low   turn-out     in   the   1999    European Elections    has   demonstrated.      People    will    only    engage     with    a European   Union   that  is  relevant   to  their   everyday   lives,   and  which they  feel  is  democratic    and  accountable.     Economic    and   Monetary Union  is moving   in  precisely   the  opposite   direction.

 

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