Where now for the Eurozone?

2012/07/3

Painting scenarios for Europe has two virtues. First, it acts as a warning: actions taken or, even more importantly, not taken now will have consequences—including potentially disastrous ones—in the future. Secondly, amidst the yawning gap between rulers and ruled across the continent it can convey the public message that ‘another Europe is possible’, which can address the fundamental experience of insecurity and uncertainty on which the populists of the far right are trading. Indeed, one of the most disturbing aspects of the scenarios painted by Maria João Rodrigues is that in three out of four of them—‘muddling through’, a fragmented eurozone and a two-tier Europe, excluding the least likely, progressive alternative—such anti-European, nationalistic forces represent a growing threat, as a colleague and myself have recently addressed in a paper for the European Network Against Racism.

What also emerges all too clearly from this exercise is how the neo-classical paradigm in Europe, still dominant though no longer hegemonic, is driving national economies into a double dip and threatening continental—and, by extension, global—recovery. Keynes famously derided the ‘practical man’—or, in Angela Merkel’s case, woman—whom he insisted was in thrall to the ideas of some dead economist. He also stressed how when the facts changed he changed his opinions. Yet, implicitly, ideas developed by Adam Smith in the 18th-century Scotland of petty-commodity production have been dogmatically reasserted as remaining adequate to understanding the crisis of globalised capitalism in the information age—while Marx’s 19th-century dissection of industrial capitalism and Keynes’ 20th-century appreciation of its financial intermediation have been dismissed. And the hypothesis of ‘expansionary fiscal contraction’ still drives austerity policies, though tested to destruction since the crisis broke.

Björn Hacker’s separate FES paper recapitulates just how this paradigm has led to the complete misrecognition of the nature of the crisis since 2008, and so the failure to tackle problems before they escalated and the adoption of inappropriate and even counter-productive policy instruments. Since markets were assumed to be self-equilibrating, no fiscal buffers were introduced at the time of monetary union to contain asymmetric shocks. It was the explosion of private, not public, debt that precipitated the crisis—outside of Greece, with its particular politics of populism and patronage—yet the Maastricht treaty had left this entirely unaddressed.  Calls for ‘structural’ reforms, which attributed poor economic performance to an ‘over-regulated’ labour market, failed to recognise their dependency on the Say’s Law fallacy that every supply creates its own demand. It is impossible to divine with any precision a ‘structural’ budget deficit as it depends on the dynamics of aggregate demand: look after unemployment and the budget will look after itself, Keynes said. Imposition of a generic ‘debt brake’ does not just prevent counter-cyclical fiscal policies but makes no distinction whatever between capital and current expenditure, even though the former may readily include projects bringing a greater economic and social return than the sum invested. Above all, austerity across Europe, driven from Berlin and Frankfurt, has set in train a vast, international ‘paradox of thrift’, wherein deflation by individual states is simply aggravating the deficit of effective demand faced by all.

How do we redirect Europe from this failed model of market fundamentalism to one where Europeans feel collectively in charge of their own destiny, in line with Rodrigues’ final scenario of fiscal union?

Clearly Germany offers the strongest opposition to this approach. Merkel’s intransigence in part derives from how the idea of ‘collective solutions’ (as the Norwegian social democrats would put it) summons up to her all the old demons of the DDR dictatorship in which she was socialised—‘competitiveness’ is for her the Leitmotiv of united Germany. Yet her concession at the European summit on 28 June met opposition across the political spectrum at home, where, more broadly, all talk of European solidarity has been represented as code for Germans supporting Greeks and others who fail to come up to the ordo-liberal mark, however bottomless the pit. But the German economy is now feeling the strain too: a collapse of the eurozone would have a fearsome effect, as scenarios outlined by the finance ministry have revealed.

The key planks of the European alternative are:

(i)              Lift the burden of risk from the citizen. The participants in Keynes’ capitalist casino had it both ways: when they won they demanded deregulation, so the house would let them gamble more; when they lost they demanded to be bailed out, or they would bring the house down. The Financial Transactions Tax is not just a very progressive way of taxing high income. It is also—and this is partly why it must be set at a significant rate (0.25 per cent, say, not .01 or .001)—essential to dampen down the tidal wave of global speculative transactions and to provide the EU with the ‘own resources’ required to begin to become a fiscal as well as a monetary union. Enforcing Chinese walls between retail and investment banking is similarly geared to preventing capitalists from playing with ordinary people’s money. Requiring higher capital ratios and introducing a Europe-wide deposit insurance scheme provide the citizen with the security that their deposits are safe.

The proceeds of the FTT could go to a European ‘green new deal’ (see below), which would help restore security in the labour market by offering training and employment opportunities for a ‘green army’ of workers, as well as to tackle insecurity (including that induced by climate change) through supporting projects in the developing world. Establishing a EU-wide minimum wage, set at 50 per cent of the national mean, would not only provide a wage floor but also militate against capital exploiting immigrant labour to undercut domestic workers, with all the explosive tensions that is engendering on the back of European Court of Justice verdicts of recent times.

(ii)            Recognise that unity is strength. The eurozone crisis could have been nipped in the bud, at little or no cost, if the European political class had sent a clear signal to the financial institutions at the outset that their solidarity would be expressed in the mutualisation of debt. The small (on a European scale) Greek debts would have been backed by the weight of European GDP. The proposal to issue eurobonds—redeemable, of course—to cover debts up to 60 per cent of national GDP provides such a guarantee while addressing the moral hazard problem (indeed, it incentivises a return to below 60 per cent indebtedness). The intergovernmental alphabet soup of EFSF and ESM should be replaced by a new mandate for the European Central Bank, required to pursue full employment as well as constrain inflation, which would issue the eurobonds backed by the sovereign guarantees of the EU-27. Banks should be able to call on the ECB directly for support, as the June summit allowed, but this should be matched by strict regulation, an equity stake and a proportionate boardroom role—banks, not democratic governments, would then face intrusive intervention. Minimum taxation on capital will be essential to ensure member states can not engage in beggar-thy-neighbour strategies which undermine the pool of revenue from corporate taxation.

Greater European unity will require democratic institutional expression, notably in a real choice at European elections between competing candidates for commission president, determined by the parliament—a supranational move, involving all European citizens, in sharp contrast to the retreat to narrow Franco-German intergovernmentalism evident in recent years. It will necessitate the parliament becoming the dominant institution in the European matrix, representing the wisdom of the European crowd, rather than the commission monopolising the right of initiative and the parliament having only a co-determining role in the miasma of technocracy and business lobbying which EU governance too often represents. The idea of a European constitution was not wrong: it failed because it addressed the ‘democratic deficit’ in a contradictorily top-down way and inappropriately partisan, neo-liberal inflections of the proposed text undermined support in France and the Netherlands. If the EU is to survive in the long run, a constitution must be revisited. A different approach to Europe in the world will also be required, with a determined effort to use European ‘soft power’ as a force for good—for example in preventing the US and China dominating global debates over stopping catastrophic climate change by developing a pro-development, pro-sustainability perspective.

(iii)           Invest in a different future. It is tempting in the face of conservative austerity for progressives to support ‘growth’. But growth will be impossible unless Europe acquires a comparative advantage in the context of a global economy, where competition on wages is obsolete (as well as undesirable) and competition on quality is insufficient in the face of emerging economies’ successes. Advantage must now be sought primarily in production of environmental goods and services and in competing on the high ground of eco-efficiency across industrial sectors. While Keynes was (in principle) happy to see government fund the digging, and then the refilling, of holes, public investment must be targeted at the green economy in this way, because it is guaranteed to bring a high return as well as being the right thing to do. In particular, a vast project to construct a European-wide smart electricity grid, fuelled by Saharan solar power and wind and marine energy, offers a vision of energy security, sustainability and Mediterranean partnership. This would be the grand projet for ‘project bonds’ and the European Investment Bank, which should also support major transnational R+D projects in the green economy. Germany has long shown at a national level how such ‘ecological modernisation’ offers the win-win scenario for Europe of (the long desired) competitive edge, employment creation and potential reductions in greenhouse-gas emissions.

But this needs to be allied with movement towards a Nordic-style social model for the whole of Europe, not only to engender greater equality—and, specifically, greater gender equality—but also to achieve fiscal sustainability in the right (revenue-focused) way. On a European scale, this could be done dramatically by matching the EU minimum-wage idea with ways to foster maximum remuneration: an 80 per cent tax on all incomes beyond 8 times the median, shared between the member state and the union, would incentivise member states to raise their highest income tax rate to that level, in a (hugely popular) ‘race to the top’, while disincentivising the ‘rent-seeking’ by company executives which has caused such popular (and shareholder) anger—and, being European-wide, this would be difficult to avoid by relocation.

Whether the revenue was raised domestically or EU-wide, alongside the proceeds of the FTT this would allow of a drastic upscaling of the structural funds—particularly if further enhanced by a transfer from the Common Agricultural Policy budget, the latter restricted to cover only the public good of environmental stewardship. The focus of expenditure should be on tackling burgeoning youth unemployment, particularly through a ‘green new deal’—inter alia tackling fuel poverty and greenhouse-gas emissions through retro-fitting of buildings—and via NGOs and social enterprises, including those with an international developmental dimension.

This is a huge agenda for the scenario of fiscal union which Rodrigues sets out. But of course those elements needed urgently to address the crisis—for instance, deposit insurance to stop the current bank ‘jog’ before it becomes a run—could be implemented immediately, while more ambitious and radical measures could be for the longer term. And it is useful to collect the complex array of instruments that must be deployed at some stage under simple and accessible headings, as set out above. Bracketing together the elements of an alternative in this way can allow citizens across the continent, with their different national cultural and political traditions, to see how the dots are joined, so to speak—and how the next European Parliament election, in 2014, might rise above the ‘second-order’ by spurring a Europe-wide debate about its future.

Politics is always a battle of hope versus fear and this is all about instilling hope in the future once more. We know from history the consequences of allowing the forces of fear, waiting in the wings, to take centre stage.

This column is part of the Eurozone Scenarios Project of the Friedrich-Ebert-Stiftung and Social Europe JournalThe long version of the scenarios paper can be downloaded hereStatistical Annex is also available.