In place
of the current German-dominated axis with France, there should be a
strengthened democratic European economic government
A different kind of Europe
by Trevor
Evans
The growth of private
international financial institutions since the 1970s has seriously
curtailed the ability of national governments to exercise democratic
control over economic policy. This was vividly demonstrated early in
the 1980s, when capital flight forced the French government of
President Mitterrand to abandon its programme of progressive economic
reforms. Since then, finance has become much stronger, and the
constraints are especially severe for smaller countries.
A strengthening of the EU
and a single monetary bloc comparable in size to the US could be used
to achieve a major shift in the balance of power. By acting at a
European level it would be possible to achieve greater democratic
control over economic policy than is possible in individual European
states.
Between 2000 and 2007 the
German trade surplus increased from ¤65 billion to ¤195 billion,
while the trade deficit of Greece, Portugal and Spain increased from
¤61 billion to ¤160 billion.
Major corporations, which
organize their activities on a global basis, can play countries off
against each other, obtaining concessions by threatening to shift
production --- and jobs --- to other locations. But because the
European market as a whole --- like that of the US or China --- is
too important to abandon, it would be possible to impose greater
regulation on corporations' activities at a European level.
The EU has, of course, in
practice taken a different path. Since the 1980s in particular, EU
policy has been dominated --- as in most member states --- by a
strongly neoliberal approach. It has explicitly allied itself with
the interests of business, leading to rising social inequality, while
embracing greater integration into world markets and an aggressive,
mercantilist trade policy --- to the detriment of many developing
countries.
The EU's most ambitious
project, the launch of the euro in 1999, has been based on major
flaws. It involves a common monetary policy but no common fiscal
policy, let alone a common wage or industrial policy. The common
monetary policy, furthermore, is based on restrictive principles
inherited from the German Bundesbank. While this approach proved
beneficial for German business so long as other European countries
pursued high growth strategies that took higher inflation in their
stride, it has proved fatal when imposed on the euro area as a whole,
contributing to higher rates of unemployment even before the outbreak
of the crisis in 2007.
The EuroMemo group
(Economists for an Alternative Economic Policy in Europe) has, since
its founding in the mid-1990s, consistently criticized the
undemocratic structures of the EU and their neoliberal policies,
while arguing that progressive economic policies can be most
effective if implemented at a European level. The most pressing issue
now is the need for an alternative to the EU's response to the crisis
of the euro area. This crisis is the result of two interlocking
factors: the international financial crisis that began in the United
States, and major imbalances within the euro area itself.
The international
financial crisis
Big European banks had
expanded their US business since the 1990s in order to take advantage
of the apparently higher returns there and were hit with big losses
when the crisis broke. A major financial collapse in October 2008 was
only prevented through large-scale government injections of capital.
The financial crisis led
to a major contraction of credit, and in the final quarter of 2008
and the first quarter of 2009 Europe was faced with the most severe
recession since the 1930s. EU output fell by almost five percent, and
the impact would have been even more severe had governments not
responded by introducing emergency programs to boost their economies.
The rescue of the banks,
the cost of the emergency fiscal programmes and a sharp fall in tax
revenues due to the recession led a large increase in government
deficits. In the euro area the deficit jumped from 0.7 percent of GDP
in 2007 to 6.4 percent in 2009.
Imbalances in the euro
area
When countries joined the
euro area, their interest rates converged on the (lower) German
level. The lower interest rates contributed to higher economic growth
and rising wages in southern Europe, although higher inflation than
in Germany eroded the real value of the wage increases to some
extent. Lower interest rates also fuelled a boom in house prices in
Ireland and Spain.
In Germany, by contrast,
policies introduced by the Social Democrat/Green government meant
that wages did not rise at all in real terms following the
introduction of the euro in 1999. With stagnant consumer spending,
economic growth was dependent on rising exports. Thanks to the single
currency, Germany was able to expand its exports to other euro area
countries without the value of its currency rising (and making its
exports more expensive) as would have occurred without the euro.
As a result of these
contrary developments, between 2000 and 2007 the German trade surplus
increased from ¤65 billion to ¤195 billion. This was closely
mirrored by the trade deficit of Greece, Portugal and Spain, which
increased from ¤61 billion to ¤160 billion. The deficit of the
southern countries was largely financed by loans from banks in
Germany and France.
The weakest link in the
polarized relation between southern and northern Europe was Greece.
In 2007, even before the crisis began to bite, the government deficit
was equal to 5 percent of GDP, principally because of a failure to
tax the well-off. This rose to some 15 percent in 2009 (the exact
figure is disputed in Greece). As financial investors began to smell
blood, speculation against Greek government bonds intensified in
early 2010. The failure of the EU to respond until the situation
became critical in May led to a weakening of the euro and the onset
of the euro area crisis.
EU imposes austerity
Although it was the big
banks that caused the crisis in 2007 and --- after being rescued by
governments --- led the speculation against euro area government
bonds, the measures the EU has adopted to reform the financial sector
are even milder than those introduced in the United States. Instead
of fundamentally reforming the financial sector, the EU's response
--- led by Germany --- has focused on imposing fiscal discipline. But
fiscal deficits are the result not the cause of the crisis. Apart
from Greece, other peripheral euro area countries had small fiscal
deficits before the crisis and Spain actually had a fiscal surplus.
In most countries, it was the private sector that had run up debts.
When Greece, and
subsequently Ireland and Portugal, were obliged to turn to the EU for
financial support, this was made dependent on implementing austerity
programs. This has driven countries into deep recessions and, in
addition to the deeply regressive social impact, tax revenues have
declined, making it even more difficult for governments to service
their debts. As the recession deepened in Greece in 2011, it was
forced to return to the EU for yet further support. At the same time,
Italy and Spain have been pressured to cut public spending as a
condition of European Central Bank (ECB) support in the government
bond market. The result is that the euro area, including Germany,
which depends on exports to other euro area countries, is expected at
best to stagnate in 2012.
The EU summit in March
2011 agreed on a series of measures for dealing with imbalances in
the euro area. However, these put the weight of adjustment on
countries facing deficits. Countries with a trade surplus, such as
Germany, are not required to expand. Countries where wages rise more
than productivity, as in southern Europe, are required to adjust, but
not countries, again such as Germany, where wages rise less than
productivity.
The EU's responses to the
crisis have either failed to deal with the causes or actually made it
worse. The insistence on making private investors take losses on
their bond holdings, for example, led to panic selling. The ECB's
three-year loans to banks of a massive ¤489 billion at one percent
interest in December involves a huge subsidy for the banks, with no
guarantee they will use the funds to buy government bonds. Due to
private sell-offs, the interest rate that Italy and other countries
will have to pay to refinance government debt in 2012 remains
prohibitively expensive and there is a serious danger of further
panic selling.
The basis for
alternatives
As an immediate measure
the ECB should announce that it will spend whatever is necessary to
stabilize government bond prices so as to end panic selling. The EU
should then introduce measures to achieve a radical downsizing of the
financial sector. In place of the current complex of giant
profit-driven institutions and the opaque mountain of complex
securities, cooperative and public-sector commercial banks should be
promoted to provide financing for socially and environmentally
desirable investment projects.
Unsustainable public
debt, as in Greece, should be subject to a debt audit (as pioneered
in Ecuador) to determine which debts are legitimate and which should
be written off. Debt reduction should also be achieved through a
wealth tax on the very rich. They own much of the 40 trillion euro
financial wealth held in the euro area in 2011 and have benefited
inordinately from neoliberal policies in recent decades. To prevent
future speculation against weaker states, euro area governments
should swap remaining government bonds for jointly issued euro bonds.
The common monetary
policy should be complemented by a coordinated euro-area fiscal
policy. In place of the current one-sided emphasis on fiscal
discipline, this should aim to stabilize the economy and promote full
employment with what the International Labour Organisation calls
'decent work'. The EU budget, currently equal to a meager one percent
of EU GDP, should be increased to at least five percent in order to
have a macroeconomic impact and to provide greater support for weaker
regions. To this end, the long-term decline in the taxation of higher
incomes should be reversed, with incomes of over 250,000 euro a year
taxed at around 75 percent. In addition, countries with a trade
surplus, such as Germany, should introduce expansionary policies so
as to strengthen euro area demand and relieve the pressure on deficit
countries.
A strong program of
public investment is necessary, especially in peripheral countries,
in order to establish productive capacity based on modern technology
and skilled jobs rather than on low wages. Financing for this should
draw on the European Investment Bank, which is already empowered to
issue bonds.
A coordinated euro area
wage policy should ensure that the widespread decline in the share of
wages in national income is reversed, and that wages in states with
lower incomes begin to converge on those with higher incomes. Normal
working hours should be reduced to 30 hours a week both to combat
unemployment and as a contribution to building a society in which
life is not dominated by waged work.
A progressive response to
the crisis in the euro area also confronts a major challenge: while
the debt crisis faced by peripheral euro area countries calls for
economic growth, environmental sustainability requires a massive
reduction in the consumption of non-renewable resources and the
emission of greenhouse gasses.
Democratizing the EU
The EU response to the
crisis has been highly authoritarian. Fiscal discipline is to be
imposed on euro area states by the European Commission and measures
will be automatic unless meetings of EU finance ministers vote with a
super-majority to suspend them. In countries such as Greece and
Portugal democratic control over economic policy has been suspended
for the foreseeable future. The current situation is unsustainable.
Peripheral countries are confronted with the prospect of prolonged
austerity and mass unemployment. But for a small country like Greece
to leave the euro area would expose it to massive economic disruption
and lead to a further large fall in living standards.
The EuroMemo argues for a
coordinated European response. In place of the current
German-dominated axis with France, there should be a strengthened
European economic government that is subject to effective democratic
control. This will require a significant strengthening of the role of
the European Parliament. But it will also be important to develop
support for progressive European policies among the citizens of the
EU.
The EuroMemo's proposals
have received support and been drawn on to a varying extent in
different member states by unions, social movements including Attac,
left parties including the German Linke and the Greek Synaspismos,
and the left wing of some social democratic and green parties. The
proposals should now be developed through a deepened interchange
between progressive economists and movement activists and used to
help build European-wide support for a fundamental change in the
direction of EU policy.
