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Posted on Sustainabilitank.info on June 2nd, 2013
by Pincas Jawetz (pj@sustainabilitank.info)

 

 

 

 

Are We Witnessing the Long-Awaited Turnaround in EU Economic Policy?

 

 

On May 29, the EU Commission (as well as OECD) published its assessment of the budgetary and reform programs of its member states and issued its “country-specific recommendations”  – with the exception of Portugal, Greece and Cyprus which had already received their “adjustment programs” earlier.

Media reporting focused on the extension (by 2 years) of the time by which some countries have to achieve their medium-term objectives, and on President Hollande’s rebuke of the EC’s recommendations for France.

Commission President Barroso spoke of the need to loosen the consolidation efforts and to start combating unemployment, especially for youths. 6 bill EUR should be available for this purpose. Suddenly, promoting growth is no longer a taboo. The recent Franco-German announcement of an impending
“gouvernement economique” or “verstärkter Koordinierungsmechanismus”
also give some hope.

 

Still, Barroso (and the EC) thinks that ”structural reforms” in goods and labor markets are the key to growth, and thus need to be speeded up. His (marginal) slowing down of austerity is not based on the recognition that the EU crisis strategy has proven to be a complete failure, but “only” on the lack of political acceptance by the unemployed citizens of the EU.
A turnaround in policy, a necessary change in the policy paradigm, this is not.

 

It seems to be impossible for politicians, both national and supranational ones, to admit past mistakes. But this would be the pre-requirement for a turnaround. Barroso and the others act as if everything so far had been going according to plan, had been successful, and that now one just adds another element to the heretofor successful strategy. This behavior, repression of facts, has been analyzed extensively by my late compatriot Sigmund Freud.
It prevents new insights from coming onto the radar screen, a requirement for a new direction.

 

Technically, the EC assessed the Stability Programs and the Reform Programs. In its own words, by assessing them jointly, the EC purports to assess the complete economic policy of its member states. Let us look at the Austrian assessment as a case in point.

 

Economic growth is mentioned only with respect to the Austrian forecasts which underlie the programs – which are seen as being too optimistic. The prime objective of the analysis is, as usual, the positively assessed path of budget consolidation. The medium-term objective (as structural deficit of 0.45% of GDP) should be achieved 2 years earlier than originally (2017) planned. But Austria’s public expenditure share path again is seen as too optimistic. With respect to the tax system, the EC tells the Austrians that the least growth-damaging real estate taxes are far below the EU average, and thus could be increased.

 

The most important points of criticism concern the labor market: the participation rates of females and seniors are by far too low, income differences between genders too high, the pension age for women creeps only marginally towards that of men, early retirement is still to prevalent; education achievements are under par, at the same time costs of the system too high, migrants are left behind. All this against the background of the recognition that (measured) unemployment in Austria is the lowest in the EU. The EC criticizes also inadequacies in financial market supervision between home and host countries, as well as too many barriers for professional services and for personal services in health and care sectors.

 

For all these areas, EC gives recommendations to speed up reforms. All these points are well taken (by me, not necessarily the authorities), but: their implementation alone, while important, does not generate growth. There is not enough emphasis on promoting innovation, on real problems with the tertiary education system, no mentioning at all about a positive growth expectation – which would require an increase in effective demand in Europe. The structural problems of the financial sector are largely ignored, with the exception of the possible budgetary consequences of winding down one of the nationalized banks.

 

Macropolicy is not mentioned, not in the Austrian assessment, not in the assessment of the Eurozone. There EC mentions the need to achieve an adequate policy mix by better coordination of budget consolidation and structural policies, but no word is lost on coordination between the fiscal stance of the Eurozone and ECB’s monetary policy. This shows once more that macroeconomic policy is a foreign concept to the EC, that economic policy consists of budget policy cum supply side (micro) economics. Briefly, imbalances in foreign trade are mentioned, plus its necessary “rebalancing”, but that is it. When reading the documents, one sees that the focus on individual countries’ assessment virtually crowds out the assessment of the Eurozone and the EU as a whole. They are seen as the sum of the individual countries, but not as an objective of macroeconomic policy.

 

Conclusion: Nothing much has changed in the EU’s policy orientation. While the soaring youth unemployment is – finally – seen as a major (mainly political) problem, austerity is slowed down and youth training programs are encouraged. But this is not a change in the mainly austerity-driven paradigm. It does appear that the requirements of the financial markets still drive EU economic policy, rather than the life expectations of the EU citizens. The recent news about the watering-down and delay of the Financial Transactions Tax are only one indicator of this. The objective that the EU should pursue the welfare of its populations, enshrined in the Treaty, seems to have been forgotten.

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Op-Ed Columnist – THE NEW YORK TIMES.

Prisoners of the Euro

TO its custodians and admirers, the European Union is the only force standing between its member states and the age-old perils of chauvinism, nationalism and war. That was the pointed message that the Nobel Committee sent last year, when it awarded the union a Peace Prize for its role in “the advancement of peace and reconciliation, democracy and human rights.” And it is the message hammered home relentlessly by the Continent’s politicians, who believe their citizens face a stark choice, in the words of Chancellor Angela Merkel of Germany, between continued integration and a return to “centuries of hatred and blood spill.”

But right now, the E.U. project isn’t advancing democracy, liberalism and human rights. Instead, it is subjecting its weaker member states to an extraordinary test of their resilience, and conducting an increasingly perverse experiment in seeing how much stress liberal norms can bear.

That stress takes the form of mass unemployment unseen in the history of modern Europe, and mass youth unemployment that is worse still. In the Continent’s sick-man economies, the jobless rate for those under 25 now staggers the imagination: over 40 percent in Italy, over 50 percent in Spain, and over 60 percent in Greece.

For these countries, the euro zone is now essentially an economic prison, with Germany as the jailer and the common currency as the bars. No matter what happens, they face a future of stagnation — as aging societies with expensive welfare states whose young people will sit idle for years, unable to find work, build capital or start families.

The question is whether they will face ideological upheaval as well. So far, the striking thing about the aftermath of the 2008 financial crisis, both in Europe and the United States, is how successfully the center has held. Power has passed back and forth between left and right, but truly radical movements have found little traction, and political violence has been mercifully rare.

In a sense, Francis Fukuyama’s post-cold-war declaration of the “end of history” — by which he meant the disappearance of credible alternatives to liberal democracy and mixed-economy capitalism — has held up pretty well in the last five years. Amid the worst economic disaster since the Great Depression, illiberal societies like Egypt and Syria have faced political crises, but the developed world has not. There has been no mass turn to fascism, no revival of Marxist economics, no coup d’états in Madrid or jackboots in Rome.

But you have to wonder whether the center can hold permanently, if unemployment remains so extraordinarily high. How must liberal democracy and mixed-economy capitalism look to young people in the south of Europe right now? How stable is a political and ideological settlement that requires the rising generation to go without jobs, homes and children because the European project supposedly depends on it? And for that matter, how well is the Continent’s difficult integration of Muslim immigrants likely to proceed in a world where neither natives nor immigrants can find work?

Already, the Greek electorate has been flirting with empowering a crypto-communist “coalition of the radical left,” even as a straightforwardly fascist party gains in the polls as well. Hungary’s conservative government has tiptoed toward authoritarianism. Spain has seen huge street protests whose organizers aspire to imitate the Arab Spring. And lately, Sweden, outside the euro zone but not immune to its youth unemployment problems, has been coping with unsettling, highly un-Scandinavian riots in immigrant neighborhoods.

These perturbations do not threaten democracy in Europe yet, and maybe they never will. Maybe the liberal democratic consensus is so bred into the bone that no amount of elite misgovernment can persuade Europe’s younger generation to turn against it. Maybe nothing can end the end of history.

But for the countries facing a youth unemployment crisis, that still seems like an awfully risky bet to make.

Yet there’s a Catch-22 facing Greeks and Spaniards and Italians looking for an alternative to just staying the course. As wrenching as it would be, the option that would do the most to defang extremists of the left and the right would probably be to abandon the euro immediately, with each country regaining control of its own fiscal and monetary policy and seeing what options open up. But at the moment, the only people arguing for that course are … the extremists of the left and the right!

For that to change, more of the Continent’s political elites would need to recognize that their beloved integration project may actually be threatening Europe’s long democratic peace. For now, there simply aren’t enough responsible people ready to unwind what should never have been knitted together in the first place. But with every increase in the unemployment rate, the odds get better that irresponsible and illiberal figures will end up unwinding it instead.

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